Renting building owned by LLC to LLC member


C

collegebedlofts

The situation is I have a small business that I run through a single
member LLC. I purchased a building under my personal name. Can I
rent the building to the LLC? The income generated would be passive
income to me.

Thanks,
JV
 
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P

Paul Thomas, CPA

The situation is I have a small business that I run
through a single member LLC. I purchased a
building under my personal name. Can I rent
the building to the LLC?


Certainly.





The income generated would be passive
income to me.


Yes it would.
 
J

JV

Yes it would.

--
Paul A. Thomas, CPA
Athens, Georgia

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Thanks Paul for the quick reply. I have a new tax advisor this year
who is doing my taxes (I have always done them myself in the past).
He said that because I have elected to be disregarded as a corporation
for tax purposes and to file a schedule C and have income pass through
to my personal income tax, that I can't rent the building to my LLC.

I have always assumed that this is correct, however my tax advisor (a
CPA) says since I have the LLC going on a schedule C, that I am
basically renting a building to myself.

Going back to my original question, and with electing to be
disregarded as a corporation, can I rent the building to my LLC?

Thanks,
JV

========================================= MODERATOR'S COMMENT:
When responding to a post, please include only those parts of the prior
post which are either necessary to context or to which you specifically
respond, and delete the rest. Insert your response directly after the
portion of the prior post to which you reply. Thanks for your assistance.
 
H

Harlan Lunsford

JV said:
Thanks Paul for the quick reply. I have a new tax advisor this year
who is doing my taxes (I have always done them myself in the past).
He said that because I have elected to be disregarded as a corporation
for tax purposes and to file a schedule C and have income pass through
to my personal income tax, that I can't rent the building to my LLC.

I have always assumed that this is correct, however my tax advisor (a
CPA) says since I have the LLC going on a schedule C, that I am
basically renting a building to myself.

Going back to my original question, and with electing to be
disregarded as a corporation, can I rent the building to my LLC?
And I'll have to go along with your CPA on this one. (Forget anything
relating to the word "corporation"; it just don't apply in this case.

While legally you can go through the paperwork of renting the building
to your LLC, there's no need. Just use the building and report
everything, e.g. taxes, depreciation, repairs,... on your schedule c.
Isn't that what he said?

ChEAr$,
Harlan Lunsford, EA n LA
 
G

Gil Faver

Harlan Lunsford said:
And I'll have to go along with your CPA on this one. (Forget anything
relating to the word "corporation"; it just don't apply in this case.

While legally you can go through the paperwork of renting the building to
your LLC, there's no need. Just use the building and report everything,
e.g. taxes, depreciation, repairs,... on your schedule c.
Isn't that what he said?

ChEAr$,
Harlan Lunsford, EA n LA

wouldn't that start you down the slippery slope of "piercing the corporate
(or LLC) veil"?

The LLC is a separate LEGAL entity. I would have the LLC rent the building
legit, and put the rental income on schedule E and the rental expense on
schedule C. Why would that not be permitted?
 
B

Bill Brown

The LLC is a separate LEGAL entity.  I would have the LLC rent the building
legit, and put the rental income on schedule E and the rental expense on
schedule C.  Why would that not be permitted?
How about because the OP is trying to convert active income into
passive income so he can deduct a passive loss generated by another
activity?

How about because the OP is trying to convert income subject to SE tax
into income not subject to SE tax?

How about some other reason that illustrates that federal tax law
considers state law if and only if Congress felt like considering
state law when enacting federal legislation?
 
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H

Harlan Lunsford

Gil said:
wouldn't that start you down the slippery slope of "piercing the corporate
(or LLC) veil"?

The LLC is a separate LEGAL entity. I would have the LLC rent the building
legit, and put the rental income on schedule E and the rental expense on
schedule C. Why would that not be permitted?
"Piercing the corporate veil" is a term used when trying to do things
within a corporation instead of proper place, individually. Quite the
reverse of this case.

Correct, the LLC is separate, but disregarded for tax purposes, and that
is what we're talking about here.

ChEAr$,
Harlan Lunsford, EA n LA
 
P

Paul Thomas, CPA

Harlan Lunsford said:
"Piercing the corporate veil" is a term used when trying to do things
within a corporation instead of proper place, individually. Quite the
reverse of this case.

Correct, the LLC is separate, but disregarded for tax purposes, and that
is what we're talking about here.








Disregarded for tax purposes - but it IS a separate legal entity by state
law.



As such I would have a rental contract in place between the LLC and the
property owner. Specifically because the LLC is not the owner of the
building.





Perhaps the OP is married (no info there) and can have the spouse own the
building, which solves the problem.
 
G

Gil Faver

Bill Brown said:
How about because the OP is trying to convert active income into
passive income so he can deduct a passive loss generated by another
activity?
how about if he just follows the IRS "self rental regulation"? (although it
is not clear if it applies to individuals, trusts, or LLCs not to be taxes
as corporation or partnership)


"Taxpayers can deduct passive losses only to the extent they have passive
income. If a taxpayer rents property to his or her wholly owned corporation,
IRC section 469 generally categorizes this as a passive activity. However,
when a taxpayer materially participates in the wholly owned corporation,
Treasury regulations section 1.469-2(f)(6) recharacterizes the net rental
income as nonpassive (the so-called self-rental rule)."

Treas. Reg. §1.469-2(f)(6) (The Self-Rental Rule)

The regulation states: An amount of the taxpayer's gross rental activity
income for the taxable year from an item of property equal to the net rental
activity income for the year from that item of property is treated as not
from a passive activity if the property:

a. Is rented for use in a trade or business activity in which the taxpayer
materially participates for the taxable year, and

a. Is not described in I.R.C. §1.469-2T(f)(5).
b.

In essence, this regulation provides that when a taxpayer rents property to
his or her own business, the rental profit is not treated as passive
activity income.



How about because the OP is trying to convert income subject to SE tax
into income not subject to SE tax?
I don't think this applies. Rental expense is a valid expense.
How about some other reason that illustrates that federal tax law
considers state law if and only if Congress felt like considering
state law when enacting federal legislation?

sure. You have one?
 
G

Gil Faver

Harlan Lunsford said:
"Piercing the corporate veil" is a term used when trying to do things
within a corporation instead of proper place, individually. Quite the
reverse of this case.

Correct, the LLC is separate, but disregarded for tax purposes, and that
is what we're talking about here.
I believe that you can pierece the corporate veil by either doing things
outside the corporation that should be done inside the corporation, or vice
versa.

While I understand that the LLC is disregarded for tax purposes, I think it
best to keep in mind state law concepts when doing taxes, and finding the
sweet spot.

It would appear that if you put finances pertaining to a personal
asset/business together with finances pertaing to an LLC asset/business on
the same IRS form, you are running the risk of someone saying you are not
treating these two separate legal matters properly. I would not run that
risk. I still see no reason not to include the rental property on Schedule
E and the business on Schedule C, and making sure you are following all
applicable IRC and IRS provisions.
 
R

removeps-groups

How about because the OP is trying to convert active income into
passive income so he can deduct a passive loss generated by another
activity?

How about because the OP is trying to convert income subject to SE tax
into income not subject to SE tax?
But you're allowed to arrange your affairs to minimize tax, so it
seems acceptable to use both Schedule E (for rent received) and
Schedule C (for the LLC's pass through income and expenses). Tax
avoidance is acceptable, but tax evasion is not.

The building must be rented at fair market value though.

One thing I'm finding strange these days is that with property values
so high, FMV rent is often less than mortgage + property tax, let
alone expenses and depreciation.
How about some other reason that illustrates that federal tax law
considers state law if and only if Congress felt like considering
state law when enacting federal legislation?
Not sure I get this.
 
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R

removeps-groups

"Piercing the corporate veil" is a term used when trying to do things
within a corporation instead of proper place, individually. Quite the
reverse of this case.
What if the LLC is sued and has to sell its assets to make payment.
If it just uses the building, then perhaps the lawyer can construe
that as the LLC owns the building (which is why it doesn't have to pay
rent). So then it means that the building could be lost in a
lawsuit. However, if there is a rental contract, them the building is
protected. I'm no lawyer, so could be way off here.
 
R

removeps-groups

In essence, this regulation provides that when a taxpayer rents property to
his or her own business, the rental profit is not treated as passive
activity income.
So does this mean that income from renting his building to the LLC
cannot be used to offset losses from other passive activity?

Also, it means that loss from the rental his building to the LLC are
unlimited? If so and suppose the loss is more than 25K, then on which
line of 1040 would he write his loss.
 
H

Harlan Lunsford

What if the LLC is sued and has to sell its assets to make payment.
If it just uses the building, then perhaps the lawyer can construe
that as the LLC owns the building (which is why it doesn't have to pay
rent). So then it means that the building could be lost in a
lawsuit. However, if there is a rental contract, them the building is
protected. I'm no lawyer, so could be way off here.
We're only talking about the tax aspects here, and as for "where to put
it", IRS don't give a rat's... uh... whatever. Just so you PUT it!

ChEAr$,
Harlan Lunsford, EA n LA
 
G

Gil Faver

So does this mean that income from renting his building to the LLC
cannot be used to offset losses from other passive activity?
It seems so, although it is unclear whether this rule applies if not
pertaining to a corporation or partnership, or and LLC taxed as such.
Also, it means that loss from the rental his building to the LLC are
unlimited? If so and suppose the loss is more than 25K, then on which
line of 1040 would he write his loss.

so it seems. If this is true, I suppose he would just put the building on
Schedule E, and not limit its loss, and then carry the net loss over to the
1040.


If I was in this situation, I would certainly be doing more research.
 
G

Gil Faver

Paul Thomas said:
Disregarded for tax purposes - but it IS a separate legal entity by state
law.



As such I would have a rental contract in place between the LLC and the
property owner. Specifically because the LLC is not the owner of the
building.
absolutely. This is essential. Here is an example of the attorney who
advises a client to keep matters separate being circumfented by a tax
preparer who is only concerning himself with filling out a tax form, and
making his life as easy as possible. Here starts the slippery slope, with
the taxpayer getting advise NOT to keep things separate, so what will the
taxpayer do next, as an expediant . . .
 
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G

Gil Faver

be way off here.
We're only talking about the tax aspects here, and as for "where to put
it", IRS don't give a rat's... uh... whatever. Just so you PUT it!

ChEAr$,
Harlan Lunsford, EA n LA

some of us like to look at "the big picture", not just tax aspects. I think
that is good advice to all . . .
 
H

Harlan Lunsford

Gil said:
be way off here.


some of us like to look at "the big picture", not just tax aspects. I think
that is good advice to all . . .
I certainly agree with you statement. However in looking at the big
picture, remember that we are here to serve the client, not to make his
life more complicated. Remember that in the OP's case, what's done is
already done, so we can't have him go back and fill out a backdated lease.

ChEAr$,
Harlan Lunsford, EA n LA
 
G

Gil Faver

Harlan Lunsford said:
I certainly agree with you statement.
always good to hear.

However in looking at the big
picture, remember that we are here to serve the client, not to make his
life more complicated.
I agree, that's why I made the point of following state law regarding
treating separate entities as separate entities.
Remember that in the OP's case, what's done is already done, so we can't
have him go back and fill out a backdated lease.
We don't know if the OP just bought the building or not. But, in any event,
he can certainly sign a lease now, for going forward.
 
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J

JV

Hello All,

Thanks for all the replies. I have been away for a few days and am
amazed at the discussion this has generated. I would like to
summarize what my original question was.

I own a single member LLC that is disregarded as a corp. for tax
purposes, I fill out a schedule C and pass the income to my 1040. The
LLC generates income, there is no tax loss in this case. In February
2007 I purchased a building under my own name "JV". The plan was to
have JV lease the building to the LLC. Triple net lease has been
generated. The reasons for having the building in my name are:

1) Remove large asset from LLC assets (lawyer said that's the way to
do it).
2) I plan to sell or close down the business in 5-7 years and rent out
the building for retirement income.
3) Rent is expense to LLC and passive income to JV.

I hired a CPA to do my taxes this year. In looking over my
information, he said that "since I had elected to be disregarded as a
corporation, I can't rent the building to my LLC". In his opinion I
am basically "renting to myself".
From some of the previous comments:
- I am married and can transfer the building to my wife if needed.
- I am the only person who has seen the lease, it could easily be
changed.
- I am paying a fair market value.
- There is no tax loss.

What I did in the past that can't change:
- The LLC paid rent to JV in 2007.
- The LLC issued a 1099-MISC to JV and reported it to the IRS.

My goal here is to get as much outside information so I know what
options I have to move forward, and more important, is this his "TAX
OPINION" or a "TAX FACT". If I have to make the rental income to me
non-passive, then that's ok.

Thanks to all for the helpful information.

JV
 

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