Self-Managed Rental Business in LLC: Does it Qualify as a Personal Holding Company (PHC)?

Based on what you've described, your LLC probably isn't a Personal Holding Company (PHC). PHCs are typically corporations where 60% or more of their adjusted ordinary gross income comes from passive sources (like dividends, interest, royalties, etc.) AND more than 50% of the company's stock is owned by 5 or fewer individuals. The key factor working in your favor is that rental income from active real estate operations isn't considered passive income under the PHC rules. Since you're actively managing the properties (handling listings, showings, tenant screening, etc.), the IRS would likely view this as an active business operation rather than passive investment income. The management fees you pay yourselves don't change this status. It's a common practice for owner-operators to compensate themselves this way. If you're concerned, you might want to maintain good documentation of your active management activities throughout the year just to demonstrate the operational nature of your business if ever questioned.

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Just wanted to share that I ended up trying taxr.ai after seeing it mentioned here. Wow - so helpful for my rental property LLC situation! I uploaded our operating agreement, last year's tax returns and some lease agreements. Within a day I had a comprehensive analysis explaining exactly why we weren't classified as a PHC and how our active management activities supported this position. They even provided documentation guidance for keeping better records of our management activities to strengthen our position if we're ever audited. Money well spent compared to the hourly rate my CPA charges just to research these types of questions!

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I have to eat my words about Claimyr. After my skeptical comment, I decided to try it anyway since I've been trying to reach the IRS for 3 weeks about my rental property classification. I kept getting disconnected after 90+ minute waits. Using their service, I got connected to an IRS agent in 37 minutes without having to sit by the phone the whole time. The agent confirmed my LLC rental business isn't a PHC since I'm actively managing properties. They even emailed me documentation to keep with my tax records. I honestly didn't believe it would work, but it saved me so much time and frustration.

A quick tip that helped me: Make sure you're documenting all your property management activities throughout the year. Keep a log of showings, maintenance coordination, tenant communications, etc. I had a similar question about PHC status for my rental LLC, and my tax attorney said documentation of active management is crucial if you're ever questioned. Photos of you at properties, email chains with tenants, and time logs all help establish that you're running an active business, not just collecting passive income.

Has anyone considered switching from C-corp to S-corp for their rental LLC? Our accountant mentioned it could help avoid potential PHC issues altogether since S-corps don't face PHC tax. We have a similar setup with 4 properties that we self-manage.

Great question! Based on your description, your LLC likely doesn't qualify as a PHC. The key test is whether 60% or more of your adjusted ordinary gross income comes from "personal holding company income" (like dividends, interest, royalties). Active rental income from properties you manage yourself typically doesn't count as PHC income under IRC Section 543. Since you're handling showings, tenant screening, maintenance coordination, and day-to-day operations, the IRS would likely view this as an active trade or business rather than passive investment activity. The management fees you pay yourselves are actually a good practice that further demonstrates the active nature of your business. Just make sure those fees are reasonable and properly documented. One thing to watch: if you ever start receiving significant passive income (like interest from large cash reserves or dividend income), that could potentially push you closer to the 60% threshold. But with just rental income from actively managed properties, you should be fine. Keep good records of your management activities as others have mentioned - it's always smart documentation to have!