Sell my house now or keep leasing it out at a loss?

NEW -> Contingent Buyer Assistance Program
Boy mino - You just want to open every can of worms, huh? Just kidding.<p>

An S corp is a income and expense reporting entity, but not a tax paying entity. An LLC is neither, and is not addressed by the IRS. It is a legal entity, but has no status for tax reporting purposes.<p>

Okay, now what does what I just said mean? It means ... if you earn rental income through an S corp, it will be reported by the S corp, and the income "passes through" to you and is reported on your personal return as rental income and is treated as such, (schedule E). If you earn self employment income through an S corp, it will end up being reported on your personal return as self employment income, the same as if you never had the S corp. It will be reported on a schedule C and you will pay s/s, medicare, fica, etc. In your example, all revenue is taxed as income, no matter if it is reported by an S corp first or if you earned the income through an LLC. An S Corp files an informational tax return with the IRS and the CFTB. An LLC files nothing with either. An LLC is a legal entity, but not a tax reporting entity. Sorry, there is no way to defer income so as to defer or avoid s/s, medicare, etc.<p>

Unless income is earned as a C Corp, but we really don't want to start that as there are numerous disadvantages to a small or single owner business filing as a C corp. In regards to an S Corp, there is no such thing as EDITDA for tax reporting purposes. And S Corp owner may keep their books in the manner they see fit and may calculate EDITDA, but it will not exist or manifest on an S Corp tax return.<p>

And just to really confuse things, there are no income or estate tax ramifications of a living trust. Most folks think that a living trust somehow avoids estate taxes. It doesn't. It is another legal entity, but all assets pass through for estate tax purposes.<p>

Fun stuff, huh.
 
<em>"Generally speaking, the losses are deducted from TRock's income every year unless he makes over a threshold amount. If TRock does make over a threshold amount the losses over the threshold amount are carried forward without his having to form anything.</em> "





awgee--Thanks again for the info. Our yearly income is $200K+ so I would assume the losses are carried forward. Also I think I would have to take the AMT. What is the difference between "allowable" and "claimed?"
 
<p>And to add to this inkling of eductation if you are above the estate tax levels you can set up an irrevocable life insurance trust to offset the estate taxes. Then if you don't want your kids to get the money you can set up a charitable trust. Can you tell I am not a big fan of taxes. </p>

<p>Thanks awgee for the info. mino asked some very interesting and complex questions. It is great that we have someone who can answer them. I have to say I was curious as to why these fraudsters have been setting up corporations and LLCs. I guess they are trying to avoid the liability personally but wouldn't the company still be liable for the 1099 for debt forgiveness? </p>
 
TRock - This gets a bit awful. At your income level, the losses will carry forward, but it is very possible they won't carry forward forever, and my memory is failing me on long they carry forward. The good news is that if you sell, the losses will offset your cap gains. Allowable vs. claimed - Some folks think that they don't need to claim the depreciation deduction because it is complicated and they know they will eventually pay tax on the recapture anyways. But what they don't realize is that they have to pay tax on recaptured depreciation that they were allowed to take during the time the property was rented, whether they claimed the depreciation deduction or not. OUCH! When I get new clients in this situation, I have to amend their last three years of returns in order to claim as much depreciation as possible.

<p>Graphrix - Folks set up LLCs to limit civil liability and to shelter personal assets from lawsuits, but other than that I am ignorant of other reasons. There is no tax advantage to forming an LLC. The LLC is not liable for any "income" shown on a 1099 C or any "income" due to forgiven debt. An LLC is not liable or does not incur tax liability. The taxpayer benefiting from the forgiven debt incurs the tax liability. And anyone who is thinking of an irrevocable life insurance trust to legally avoid estate taxes, remember the key and very important word is <strong>irrevocable</strong>.</p>
 
<p>TRock - I need to correct some bad information I gave you. </p>

<p>The carry forward losses from a rental property will carry forward indefinitely. There is no time limitation, unless you make under the threshold amount some year.</p>

<p>Upon sale, the accumulated losses, not including depreciation, will be included, (as a negative number), in your income for the tax year in which you sell. The losses will not offset capital gains. The losses will offset regular income. </p>

<p>The recaptured allowable depreciation will be taxed seperately and probably at the 25% rate.</p>
 
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