For those of you that own residential property that you rent out, do you maintain a separate bank account for that purpose?

In a couple years I will be changing careers and locations and one of the things I am looking at is rental property, perhaps for modest monthly income but mostly for long term investment. My question is do you use a different bank account for all things rental related, and if so, how do you take profit out of it? Any special way, or just a standard withdrawal?

Specifically, I'll hopefully (God-willing) have a 457(b) account that will be used to facilitate this... I will likely have enough to purchase a small property/duplex outright but that would lead to a big tax it that year.

I was thinking a better plan might be to take enough money out to finance the purchase (down payment) and cover a year of mortgage payments. For instance, lets say $50,000 for an easy round number. So in this scenario I could set-up auto payments on that mortgage from that separate account and all rent checks get deposited to that same account. say after all is said and done I am able to clear $300 profit a month that I want to access, is the best way to do that just to have the money transferred from one account to another?

This sort of thing is new to me and I don't know what I don't know...

This message has been edited. Last edited by: thumperfbc,

I do not have a separate account, though I can see advantages to having one. It just hasn't become an issue. All the separate issues involved with income and deductible expenses are evident in the tax returns and that's been good enough for me.

FWIW, I live part time in both properties that I also rent part time.

My rental property is separate from my personal. It is an LLC and has its own bank account. For tax purpose the annual profit is just combined with my personal. I move funds freely from the LLC to my personal account when needed.

I recommend a separate bank account & transferring money from business to personal account is best. If your Schedule E is audited & you have mixed business with personal the auditor will review you personal expenses also. Also get a separate Credit Card to use for the rental property. I suggest you contact a local CPA since your personal tax situation may dictate the deduction of tax losses. If rental property is mortgaged it is likely you will have a tax loss. Rental property tax losses may not be fully deductable. Also you may have to pay CA capital gains when the property is sold. Tax on the recapture of the depreciatiion may exceed any deductable losses depending on the state you are living in. I had a tax client that sold rental property in IL and is a resident of NJ. NJ does not allow loss carryforwards. Talk to your CPA!

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Originally posted by ridewv:
My rental property is separate from my personal. It is an LLC and has its own bank account. For tax purpose the annual profit is just combined with my personal. I move funds freely from the LLC to my personal account when needed.

This...my accountant recommended a separate account. My attorney recommended an LLC. I took their advice and did not regret it. (Sold all when I retired)

Thanks for the thoughts so far, I do appreciate it. I currently don't use an accountant... for tax purposes we are very simple and the standard deduction is better than trying to itemize for us.

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Originally posted by Anush:
I recommend a separate bank account & transferring money from business to personal account is best. If your Schedule E is audited & you have mixed business with personal the auditor will review you personal expenses also. Also get a separate Credit Card to use for the rental property. I suggest you contact a local CPA since your personal tax situation may dictate the deduction of tax losses. If rental property is mortgaged it is likely you will have a tax loss. Rental property tax losses may not be fully deductable. Also you may have to pay CA capital gains when the property is sold. Tax on the recapture of the depreciatiion may exceed any deductable losses depending on the state you are living in. I had a tax client that sold rental property in IL and is a resident of NJ. NJ does not allow loss carryforwards. Talk to your CPA!

The property may or may not be in CA... we will be leaving the state. I own a house here, with considerable equity, but the working plan is to sell it and use the profit to buy a house wherever a land, hopefully mortgage free...

Though we WILL consider keeping it and renting it out... I think it is clear keeping it and renting is the better long term financial decision, but there are hurdles.
1) I don't really look forward to being a long-distance landlord, but perhaps it isn't as big a deal as I think it might be
2) The house would need some work to be rentable (flooring, bathroom updates)... we can't really afford to do those now and mw wife would have issues with us fixing it up only to rent it out.
3) I don't really don't want to have any ties to California, legally speaking, when we escape.

quote:

Originally posted by ridewv:
My rental property is separate from my personal. It is an LLC and has its own bank account. For tax purpose the annual profit is just combined with my personal. I move funds freely from the LLC to my personal account when needed.

Do you have to do any sort of specific record keeping when you transfer funds from the LLC account to the personal? I assume it is impertive that personal purchases are not conducted directly from the LLC account?

For instance, you want to buy a item for personal use unrelated to the property and want to use $300 from the LLC... instead of using the debit card/check from the LLC to pay for it the proper method is transfer the money first (memo attached to transfer?) and then purchase the item?

quote:

Originally posted by ridewv:
My rental property is separate from my personal. It is an LLC and has its own bank account. For tax purpose the annual profit is just combined with my personal. I move funds freely from the LLC to my personal account when needed.

This means you have taxes to prepare for you personally and a separate tax return for the LLC, correct? The LLC pays all costs related to the property such as taxes, repairs, maintenance, replacements, right?

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Originally posted by thumperfbc:

This means you have taxes to prepare for you personally and a separate tax return for the LLC, correct? The LLC pays all costs related to the property such as taxes, repairs, maintenance, replacements, right?

Federally, the LLC is filed on 1040 sch C. Very uncomplicated, especially if you're a single member LLC. States differ in their requirements. In PA a separate state corporate tax form is filed.

Moving money between LLC and personal is a piece of cake since all the money is on the same form anyway. I usually just noted "services rendered". If I needed extra money, I may have charged the LLC $500 to change a washer though.

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I usually just noted "services rendered". If I needed extra money, I may have charged the LLC $500 to change a washer though.

This is not a valid expense on the Schedule C. Personal labor is not deductable.

Yes. Definitely separate checking

quote:

Originally posted by ridewv:
My rental property is separate from my personal. It is an LLC and has its own bank account. For tax purpose the annual profit is just combined with my personal. I move funds freely from the LLC to my personal account when needed.

^^^ THIS! ^^^

A good accountant can set up your LLC as well as taking you through the deductions and breaks for your taxes.

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Originally posted by Anush:

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I usually just noted "services rendered". If I needed extra money, I may have charged the LLC $500 to change a washer though.

This is not a valid expense on the Schedule C. Personal labor is not deductable.

You left off the smiley face. Single member LLC. Just write yourself a check.

I haven't done this yet, but I need to. In my line of work (independent insurance sales), a lot of folks have a dedicated business account at a bank and a credit card that is only used for business expenses and paid from that checking account. All commissions are deposited into that account. At the end of the year, the CPA just looks at the gross amount of deposits minus the expenses and that's the profit, no other info needed, unless audited.

The way I do it now, I have daily deposits from 15-20 insurance companies and scatter my expenses around various credit cards that pay the most in cash back or points. It's an accounting nightmare. But combining my personal spending on those cards gets me the most benefits in cash back and points.

Two rental houses for the Bytes family. We keep separate checking accounts for each property. Maybe a bit of overkill but it makes things a little more simple on April 15. We may consolidate into a single account after renovations on each property have been completed.

I don't really see any need or accounting issues that would require multiple checking accounts. Whomever owns the house(s) should have a checking account. If you own a home in your name, you can use your personal checking account. If the home is in a LLC, then the LLC should have an account. If you have multiple homes owned by multiple LLCs then perhaps multiple accounts are in order, although most in this group would have a property management company that collects the rent.

I have rental properties. At the end of the year I tell my CPA what my gross rent was, and then an accounting of the expenses. She's never asked for bank records related to the rentals. As far as the government is concerned, a single member LLC and an individual are one in the same as far as money goes. The LLC's money is your money.

quote:

Originally posted by ridewv:
My rental property is separate from my personal. It is an LLC and has its own bank account. For tax purpose the annual profit is just combined with my personal. I move funds freely from the LLC to my personal account when needed.

I’ll agree with this as well. I’ve had an LLC for over 20 years holding several rental properties. It makes bookkeeping and defense in an audit much simpler.

Also look into a 1031 exchange when taking money from the sale of another property to buy your new property. There are some very strict guidelines that have to be met but it has literally saved me over $100k ….

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Originally posted by smlsig:

Also look into a 1031 exchange when taking money from the sale of another property to buy your new property. There are some very strict guidelines that have to be met but it has literally saved me over $100k ….

Isn't a 1031 exchange for selling an investment property and then funding a new one? The only property we currently own is our house of residence. If it gets sold it would be used to purchase another house for our personal residence... and likely not for over a year.

The advantage of selling the CA house is the $500,000 per couple exclusion from capital gains taxes.
A disadvantage--very pertinent in our case--is the possibility you may want to move back to CA in the future, and if property values continue to increase it may not be possible to buy your way back.
We have rental properties in AZ. I dislike having to go through a distant property manager, but the value appreciation has been very good.

We have a separate checking account for rental properties, but don't have an LLC. Our CPA said the main advantage is liability, and if we have good liability coverage we don't need it.

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Originally posted by thumperfbc:
The property may or may not be in CA... we will be leaving the state.

Then I'd suggest make it part of the plan for this NOT to be in the state.

Unless you like filing CA state tax forms and paying CA taxes as long as you own it. Plus CA will take its plus-sized slice of tax on the capital gain when you sell.

Also, investigate the eviction/rent control/tenant rights situation of wherever jurisdiction you do decide to have your rental. Some of those rules can make it onerous to own rental properties.

Think ahead on insurance as well. In addition to property coverage, you will probably also want loss-of-rental coverage as well as liability coverage for the tenants and their guests.

Final thought. Putting the ownership in an LLC is a good idea for protection of your other assets. There are costs (setting it up, as well as ongoing overhead - another tax form, state filing fees etc.) but the asset protection is worth it. This is an investment and you will want professional advice (legal and accounting) for your specific situation before making your final plan.

A separate account will simplify accounting.

You need to talk to a lawyer and an accountant about your new venture. Please.

Thanks all, this is great info to be taking in. It seems a bit of hard decision on whether to keep the house or sell it. We’ve got a few years to learn, ponder, decide, and plan.

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Originally posted by jhe888:
A separate account will simplify accounting.

You need to talk to a lawyer and an accountant about your new venture. Please.

What kind of lawyer should I be talking to? I only know one personally, and his fully time job is and always has been a cop. Will I be able to go to a lawyer and explain what we want to do and they will be able to break down the pro’s/cons of various scenarios and help us come to a decision? Is that one of the main points of talking to them? Secondly, help get things set up properly?

Thanks so much.