Can Each Series in a Series LLC be Taxed Differently?
A Series LLC is a limited liability company that allows you to create multiple entities under one “master LLC”. Each new entity is called a “child series” and can have separate membership interests, assets, operations – and treatment for tax purposes.
Series LLCs are popular among real estate investors because it’s easy to add additional series, and they provide excellent asset protection and flexibility in tax treatment.
Taxation of Series LLCs For Real Estate Investors
One of the primary benefits of using a Series LLC is you only have the file the articles of organization one time. To add another series all you need is an operating agreement.
This cuts down on the state fees required to open and maintain separate LLCs and reduces the administrative burden of managing multiple LLCs.
For these reasons, Series LLCs are popular among real estate investors and business owners who own multiple properties with different partners and structures.
You are a real estate investor and professional property manager. And often purchase over 10 properties a year with multiple different partners.
You open up a Series LLC and use one as a property management company that is taxed as an S-Corp. Whenever you purchase a property with a partner, you create another series owned by you and that partner, and it’s taxed as a partnership. When you purchase a property yourself you simply have it taxed as a disregarded entity.
Using the Series LLC helps you reduce the filing and administrative fees associated with opening and maintaining a new LLC each time you by a new rental property.
Tax Risks of Series LLCs For Real Estate Investors
There is some uncertainty around the federal tax treatment of Series LLCs as there are no laws or official guidance provided by the IRS.
But unofficial guidance from the IRS and a Tax Court decision are available. And they indicate that, at least in certain situations, treating each “child series” as a separate entity with different tax elections is appropriate
The Bottom Line
Generally, LLC’s are not used primarily for their tax benefits, but rather their liability protection.
However, due to the ease of adding additional series, liability protection, and flexibility in the tax treatment of each individual series – Series LLCs make sense for real estate investors who operate businesses and purchase real estate with different partners under multiple structures.
And since there is no official laws or guidance from the IRS, it is important to work with a qualified CPA and attorney to ensure you’re following all the rules and regulations to maintain the liability protection of each series.
Author: Thomas Castelli, CPA is a Tax Strategist and member of The Real Estate CPA, an accounting firm that helps real estate investors keep more of their hard-earned dollars in their pockets, and out of the government’s, by using creative tax strategies and planning.