How your co-ownership LLC is taxed
Ah yes, everyone’s favorite subject… taxes. Owning a property as an LLC does not mean you are exempt from taxes, but it does make filing taxes easier and more straightforward. LLC’s are called “pass-through entities” because tax responsibilities are passed on to each member of the LLC. Your profits and losses will be filed by each individual in their personal income tax returns based on their % ownership of the LLC. (Known as a distributive share)
Example
Your LLC group has 2 members who each own 50% of the LLC and make $50,000 in profits for the year on your property. Each member will pay income taxes on $25,000. Pretty straightforward.
Distributive share
If you think you are super slick, and want to avoid paying taxes by leaving profits in the LLC, rather than distribute them to the group members, you are out of luck. Profits, whether or not they are distributed to the LLC members, are still taxed as income. Nice try.
Example
Your LLC makes $50,000 profits and you decide to keep it in your LLC bank account to pay for upcoming renovations and maintenance. Your LLC has 2 equal members. Each member will still need to pay income tax on $25,000 even if it is not distributed to them personally.
Deductibles & write-offs
One of the benefits of owning property as an LLC is the ability to write off a lot of your expenses related to operating your business, i.e. your property. Expenses related to generating income can be deducted from your income at the end of the year. What is the net result? The income you and your group is taxed on goes down, thus you pay less tax.
While this seems straightforward, there are a lot of nuances and interesting deductions and write-offs that are uniquely calculated. Your group should consider working with a tax professional or accountant to make sure you are filing properly. You might find some extra deductions as well.
Setting aside money to pay taxes
Because LLC profits and losses are taxed as personal income, you will need to set aside your own money for taxes. Additionally, LLC members will pay quarterly taxes. For this reason, we recommend working with a tax professional or accountant to understand the filing process and get a feel for it. The upside of paying taxes quarterly, is it makes estimating taxes more precise and less complicated at the end of the year.
State taxes
In some states, like California, a LLC pays a “renewal fee” or a “franchise tax fee”, that is a flat yearly fee. In California a LLC pays $800 per year to operate. Other states can expect to pay about $100. This is paid by the LLC and NOT per individual. You’ll want to file with your state’s franchise tax board and look up specifics.
In California, it is possible to pay more than the $800 annual flat fee, IF you make more than $250,000 in profits in a year. At this point, you pay based on a tax bracket.
California tax franchise board LLC information: https://www.ftb.ca.gov/file/business/types/limited-liability-company/index.html
Nestment, Inc. does not guarantee and is in no way responsible for the accuracy of information provided in this blog post. All information is provided “AS IS” and with all faults. Data presented here may not reflect all real estate activity in the market. While the information on this site is about legal and tax issues, it is not intended as legal or tax advice or as a substitute for the particularized advice of your own attorney and tax professional.