Hello to all, and thank you in advance for any opinions you share.
Facts: Client (Husband) has SMLLC (disregarded entity) for a consulting firm, reporting all income and expenses on schedule C. We will call this SMLLC #1.
He purchased a rental building in April, 2015 that he uses 1/4 for his SMLLC, and 3/4 rented to the public. The building and loan were purchased under a new and different SMLLC. We will call this SMLLC #2.
I have just returned from two tax seminars where both speakers thought it would not fly for SMLLC #1 (subject to SE tax) to rent his office space from SMLLC #2 (rental income not subject to SE tax).
If this is the case....we have some real tax planning to do.
Options:
- Leave as it is, because in your opinion, SMLLC #1 can legally rent from SMLLC #2, and deduct the rent as a business expense, and claim the income as passive income.
- Admit the spouse into SMLLC #2, converting the rental property to a partnership and this partnership rent the building to SMLLC #1....(I still wonder if only 1/2 the rent would be accepted as a business expense)
- Have the rental building put into the wife's (new) SMLLC. Her SMLLC would then own 100% of the rental building and her spouse would simply be one of her tenants, allowing the business deduction to SMLLC #1.
The couple does not live in a community property state, and they file a joint return.
Ideas?