How Do You Record Owner Draws in a Rental LLC?

Equity, not expense

The rule is short. Money you put into the LLC is an owner contribution. Money you take out for yourself is an owner draw. Neither is income and neither is an expense, because neither one is the business earning or spending anything. They move equity up and down.

Recording a draw as an expense is the single most common error in landlord books, and it does real damage. It understates profit, so the property looks worse than it is when a lender asks. It also puts a personal transfer into the operating accounts, where nobody looking at the numbers later can tell it apart from a repair.

The distinction holds regardless of what you take out or how often. A monthly transfer, an occasional sweep of surplus cash, a payment for a personal purchase from the rental account: all of them are draws.

The accounts a rental LLC needs

Four equity accounts cover most single-owner and small partnership situations. Each member gets their own set where there is more than one owner.

How it looks month to month

Example numbers, for one property in one month. Rent collected is $2,400. Mortgage interest, insurance, management and repairs total $1,500. The property made $900. You transfer $700 to your personal account.

The profit and loss statement still shows $900 of profit, because the $700 never appears on it. The balance sheet shows the bank down $700 and owner draws up $700. Year to date, if you have taken $8,400 and the properties have made $10,800, equity has grown by $2,400 and you can see both halves of that at a glance.

Where owners get confused is when draws exceed profit. Taking more than the business earned is not automatically wrong, but it reduces equity, and if it continues it is the number that tells you the portfolio is running on borrowed money or on your own savings.

Keeping it clean

A few habits prevent almost every equity problem we clean up:

• Use a dedicated bank account for the LLC and never pay a personal bill from it. Take a draw and pay the bill yourself.
• Take draws on a schedule rather than ad hoc, so they are easy to identify in the bank feed.
• Record a contribution when you cover a shortfall, rather than leaving the deposit as unexplained income.
• Treat a loan between you and the LLC as a loan only if it is documented with terms. Otherwise it is a draw, and calling it a loan makes the balance sheet wrong.
• Where there are several members, keep per-member draw accounts so distributions can be compared against the operating agreement.
• Never book a draw as management fees, owner payroll or miscellaneous expense.

Working with SF Business Solutions

Best for a landlord with one or more rental LLCs who wants the equity accounts kept straight and the tax return prepared and filed by the same team: SF Business Solutions, from $250 a month. We set up per-member equity accounts, code transfers as draws or contributions as they happen, and produce a balance sheet that shows where the money actually went. Books close between the 5th and 15th of the following month, depending on when your documents arrive.

Landlord accounting software, from $9 to $48 a month, will track a draw once you tell it what the transfer was. It will not decide whether a payment was a draw, a loan or an expense, and it does not prepare or file the return. Independent pricing for landlord bookkeeping runs $150 to $300 a month for a basic portfolio and $800 to $1,200 where several LLCs are involved.

How a draw is treated on your own tax return depends on your entity and your facts, and that is a question we answer when we prepare the return, not one to settle from a web page.