Member

Federal tax refund

My tax refund question is based on social security and pension income, rental and LLC income. Loss on rental and LLC business and schedule A deductions exceeded the amount I paid in taxes. Therefore I was refunded all paid income taxes for 2017. Is it possible to recover the additional money that I lost which exceeded the income tax paid?

5 Comments
Catalyst V

Federal tax refund

The short answer is no. You can't get back from the IRS, more than you paid in.

I suspect you are referring to losses on the rental income. You can't realize those losses until the tax year you sell the property.

Rental income is passive. Likewise rental expenses are passive. You can only claim passive losses against passive income. Now with rental property it is very common for rental expenses to exceed the rental income with each passing year. Especially if you have a mortgage on the property. For most, the depreciation you're required to take by law, added to the deductible mortgage interest, insurance and property taxes you pay can quite easily exceed the rental income for the year, before you even get to the other deductible rental expenses.

When your passive losses exceed your passive income, they reduce the taxable passive income to zero. Then any remaining losses are carried forward to the next year. Traditionally, the carry forward amount will increase and grow with each passing year. Then in the tax year you sell the property that is the only time you can take those passive losses against other ordinary income, thus reducing your tax liability. But understand that most, if not all of those losses will be offset by the depreciation that you are required to recapture in the year you sell the property. Recaptured depreciation is taxable in the year you sell the property.

 

Catalyst V

Federal tax refund

Oh, and on the LLC losses, those to are carried forward each year, and will be deducted in the tax year the LLC has the income to deduct them from. (Hopefully, you don't have your rental in a single member LLC, as that can present it's own problems.)

Member

Federal tax refund

Thx. Your explanation is very understandable and appreciated.

Member

Federal tax refund

Thx. Might u elaborate on the problems of holding the rental under an LLC. Thx in advance for ur response!

Catalyst V

Federal tax refund

Rental income is passive, meaning you don't physically "do anything" on a recurring basis to earn it.  Since you don't "do anything" on a recurring basis to earn rental income (all you do is "sit there" and collect it), rental income is not subject to the additional self-employment tax, doesn't count for your social security earnings (since you don't physically "earn" it) and can not be included when figuring your maximum allowed retirement account contributions.

Now because it's passive income, it's reported on SCH E. It doesn't matter if you're filing a personal tax return (1040, 1040-A or 1040-EZ) a partnership or multi-member LLC return (IRS Form 1065) or a corporate return (1120 or 1120-S). It's still reported on SCH E as a part of whatever return you are filing and the income is still passive.

Now with a sole proprietorship or single member LLC, the IRS considers that a disregarded entity. Therefore it's reported on SCH C as a part of your personal tax return. SCH C is for "earned" income, that you go out and physically "do something" to earn on a recurring basis.

So if you create a single-member LLC for your rental, absolutely nothing concerning the rental will be reported on SCH C, since you can't use SCH C for passive income, or for passive expenses. You still have to report it on SCH E. That means if you do file a SCH C, the income/expenses on that SCH C will be all zeros. (Assuming the rental is the only thing owned by the LLC.)

There's also other legal problems to. For example, if the title to the property is not titled to the LLC, then the LLC doesn't own it. So there goes that supposed "veil of protection" that someone (possibly a CPA) told you that you would have by doing this.

Think you can just do a quit claim and transfer it to your LLC? Think again. You can't just go transferring ownerwhip without the express permission of the mortgage holder. If you do that, they *will* find out about it, and that will put you in breach of your mortgage contract. Generally, a breach of that contract will require payment in full immediately, and if not paid the mortgage hold legally can (and most likely will) foreclose on the property.

Think your lender will give you permission? Highly unlikely. Remember, your LLC is a disregarded entity. THe last thing the lender will allow is for you to transfer it to an LLC and then file bankruptcy for that LLC. The risk is not worth their taking.

Now the lender might let you sell the property to the LLC, as that's how your lender makes money. But chances are that unless you sign over your first born, your LLC will not qualify for the loan.

Heck, there's a ton more issues this creates too, and I could write a book on it.