How To Structure A Rental Property Business
Here's my situation:
I live in california and I acquired 2 properties that are being rented out right now. These properties' rental income barely break-even. At the end of the year, I will be showing loss on my tax return because of depreciation. Here are my concerns:
1) Is there any way to re-structure my financial statement by maybe putting up a corporation for the rental property, transfer these 2 properties to the corporation instead of holding the title under my name and just get a property management commission. I am a licensed real estate salesperson myself.
2) If I do what I mentioned in #1, can I offset the loss in my personal income tax return at the end of the year?
3) If I don't do anything and have these 2 properties attached under my name, these will give me a very high debt to income ratio and will pull down my FICO score. Then I wouldn't be able to avail and buy any more properties.
Please help. Thank you!
esther 1978,
Most RE investors that I know are in a similar situation. They show negative income after depreciation. This is usually good since it can shelter other income (with caveats) or future income. Since you likely qualify as a real estate professional, you are likely to benefit.
When you apply for a real estate loan, the lender will look at the gross income less tax and insurance and then figure 25% of gross for vacancies, management, maintenance in calculating net income.
Also keep in mind that if you do put properties in a corporation the lenders will be looking to you and not your corporation as being responsible for the RE loans, so they will show on your credit report.
Putting propery in a C corporation is usually not recommended. One reason is that C corporations are not pass-through entities so losses do not get passed through to your tax statement. You will find a great deal of material on this site that suggests LLCs or other structures for purpose of asset protection.
Regards,
Ed
You made a good point, Ed. Thanks for the insight.
I will definitely read upon protection asset. That's one of my biggest concerns as well. I just don't know how to get started. I thought having a corporation rather than LLC would be better not knowing anything about passing on taxes.
Thanks a lot and more power to you!
Another possibility for asset protection is an umbrella policy. You can get a $5 million umbrella for very little. Getting insurance for properties held in a corporation (LLC) can be more expensive or difficult. Some would suggest putting the property into a land trust and essentially place the trust in the LLC. There are many posts that address this topic.
I have a "C", an "LLC", living trust, etc. I'm into a little bit of everything and its important to have assett protection in place, particularly with rental property.
I found the people at Nevada Corp very helpful. It was to my advantage to incorporate outside of my state.
Hey, go read on http://www.smallbizincorporator.com . There's a lot of good info there, plus you can register LLC's and stuff there.