I recently received this question at USTaxAid.com. The question is a little complicated, so here are the simplified facts:
One NC AirBnB
Two SC Airbnbs
1 PA AirBnB that is managed by the taxpayer, but not owned by the taxpayer
So far, the taxpayer has a SC LLC to handle the property management for the PA AirBnB.
There are a number of options that the taxpayer listed for the next round of entities, but rather than address those, I’ll cut to the chase.
What entities should the taxpayer have, what state should they be in and what type of filing do you do (Schedule C – business or Schedule E – passive rental)?
How Many LLCs Do You Need?
If you want to just protect the real estate assets, form 1 NC LLC for the one AirBnB and 1 or 2 SC LLC(s) for the two AirBnB. In case of the SC LLCs and the question of 1 or 2 would revolve around how much risk you can withstand. If there isn’t much equity in those properties and you are okay with a little more risk, form one. The downside is if there is a lawsuit against one then it will put your other one in jeopardy. Two SC LLCs is safer.
You would file a Schedule C for the properties. The NC income/loss would mean you also file a NC and the SC income/loss would mean you also file a SC return, regardless of where you live.
You do need an entity to handle the property management because there could be liability associated with the business. I’m guessing that you live in SC and that’s why you formed the entity there. You do have PA sourced income, though, so you’ll need to file a PA return for the net income as well. This would be a Schedule C as well.
When Do You Elect to Be Taxed As an S Corporation?
An LLC elects how it wants to be taxed. If a single member LLC doesn’t make an election, it will be taxed as a Schedule C if a business or Schedule E if passive real estate.
In the case of the Airbnb’s, there is a bit of a conflict. On one hand, you don’t want a corporation to hold appreciating property like real estate. And on the other, if you do elect to be taxed as an S Corporation, you can avoid self-employment tax on the net income.
Usually, most clients decide to just pay the self-employment tax. Talk to your CPA about the best approach for you.
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