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Have an LLC owning a rental property? Your Tax Status Can Cost You Money.

If you own or plan to own rental property, it’s a great idea to own it with a limited liability company (“LLC”). The tax status that you elect for your LLC can cost or save you taxes. You have a variety of tax statuses to chose from with an LLC. An LLC can be treated as a sole proprietorship (if single member), a partnership (if multi-member), or you can elect to treat your LLC as an S-Corp or C-Corp. If you elect S-Corp, you might run into a level of unnecessary taxation. Here’s why: rental properties are considered passive income even if you actively participate in the rental activity. Passive income, by definition, is not subjected to self-employment tax.

However, if you elect to have your LLC be treated as an S-Corp for taxation purposes you could potentially have to pay yourself a reasonable wage for the management of the LLC which in turn is subjected to FICA and Medicare taxes (15.3%). This is the same as paying self-employment tax. To avoid this grief and headache, have your rental property LLCs be regular LLCs (that is choose the default status) and your business LLCs be LLCs with the S-Corp election.

Need help with forming an LLC or electing the right tax status for your LLC?  Call 412.391.1014 or click here to be connected to one of our business attorneys.


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