Forming a limited liability company (LLC) for your rental property can provide some major advantages compared to personally owning the property. An LLC helps protect your assets and can provide tax benefits as well.
Forming an LLC for rental property ownership provides liability protection, allows pass-through taxation, and makes financing and ownership transfers simpler. LLCs limit owners’ personal liability, so their personal assets are protected if sued, and profits/losses pass through to owners’ personal taxes. LLCs also allow easier buying/selling of the property and access to commercial loans.
If you own one or multiple rental properties, you may want to consider putting each into its own LLC to maximize the benefits. Here are the top 10 reasons why using an LLC for rental property is beneficial.
1. Liability Protection
The top reason to use an LLC for rental real estate is to protect your personal assets. If you own the property under your own name and get sued, your personal belongings are at risk if you lose.
With an LLC, only the assets owned by the company itself are vulnerable in a lawsuit. Your rental property could be taken, but your personal bank accounts, retirement accounts, and other properties are shielded.
This gives you much better protection if you ever get sued over an issue with the rental unit, like an injury on the property.
2. Avoid Double Taxation
When you earn income personally, it gets taxed once by the IRS. With a regular corporation, income gets taxed twice – at the corporate level and again for shareholders.
An LLC for rental property gets the benefit of pass-through taxation. The business income passes through the company directly to your personal tax return.
You only pay taxes once on the rental profits, avoiding the double taxation issue faced by corporations.
3. Tax Deductions
There are tax deductions when you personally own rental property, like mortgage interest and depreciation. You can take the same deductions when the property is owned by an LLC.
In some cases, it can be even better to take deductions through the LLC. You may qualify for more deductions since you’re operating an active business.
4. No Rental Property Limit
If you personally own rental property, banks will typically only lend to you for up to 4 mortgaged properties. Once you hit that limit, getting additional financing becomes much harder.
This limit does not apply when properties are owned by an LLC. You can own unlimited rentals under an LLC structure. The properties are owned by the business entity, not you personally.
5. Refinancing Flexibility
Refinancing a personally owned rental gets complicated if you want to access the equity for other uses. You either have to refinance the entire mortgage or take out a home equity loan.
With an LLC-owned property, you have more options. The company can take out loans against the equity while keeping the existing mortgage intact.
6. Business Credibility
Renting out property personally can feel informal, almost like a side hustle. Forming an official business entity legitimizes your rental operation.
You appear more credible to potential tenants, vendors, lenders and anyone else you interact with. An LLC signals you are running a serious business.
7. Keep Finances Organized
Owning rental property means tracking income, expenses, profits, and taxes across all your properties. With several personally owned rentals, your finances can get disorganized quickly.
Putting each rental in its own LLC keeps finances neatly separated. All income and expenses for Property A go through LLC A. The same for Property B and LLC B. This makes accounting much simpler.
8. Build Business Credit
As a registered business, your rental property LLC can establish business credit under the company name. This is separate from your personal credit.
You can qualify for credit cards, loans, and financing based on the LLC’s merits alone, not your personal score. Building strong business credit provides access to more capital.
9. Deduct Expenses
Virtually any expense associated with the property can be deducted if it is owned by an LLC. This includes obvious things like maintenance, renovations, and management fees. It also includes indirect expenses like office supplies, software, internet service, and mileage to manage the unit.
More deductions means lower net income, which leads to less tax owed. Run expenses through your LLC to maximize write-offs.
10. Separate Rental Activities
Personally owning multiple properties across different areas can be challenging to manage. Forming an individual LLC for each rental segments operations.
The finances, expenses, tenants, and issues for Property C stay compartmentalized in LLC C. This approach makes managing a larger rental portfolio much simple
Should You Put Rental Property in an LLC?
Deciding whether to put rental property into an LLC involves weighing the pros and cons of using a limited liability company structure. Here are some key factors to consider:
Pros of an LLC for Rental Property
- Liability protection for personal assets
- Access to pass-through taxation
- No limit on number of mortgaged properties
- Tax deductions and write-offs
- Build business credit separately
- Legitimize rental business
- Separate financials for each property
Cons of an LLC for Rental Property
- Additional formation costs
- Annual taxes and fees
- Administrative paperwork
- Keeping business finances separate
- Getting financing under LLC name
When an LLC Makes Sense
- Owning multiple rental properties
- Holding high-value properties
- Wanting to expand rental portfolio
- Conducting extensive renovations
- Experiencing high-risk tenants
- Running a professional operation
When an LLC May Not be Necessary
- Owning a single, low-value property
- Renting to trusted, long-term tenants
- Wanting simple finances
- Limited renovations and repairs
- Staying under 4 personal mortgages
- Handling management yourself
Putting each rental property into its own LLC provides the maximum benefits, but a single LLC holding all your rentals also provides advantages over personal ownership.
Consult an accountant or attorney to decide what makes the most sense for your situation. An LLC provides vital protections and benefits for serious real estate investors.
How to Form an LLC for Rental Property
Choose a unique business name and register it with your Secretary of State’s office. Appoint a registered agent to accept legal documents for your LLC. Create an operating agreement outlining policies, procedures, and structure of the LLC.
If you decide an LLC is the right choice for your rental real estate, here is how to set up the company
Choose a Business Name
Select a name for your LLC. It must include “Limited Liability Company” or an accepted abbreviation like LLC or L.L.C.
The name must be unique and distinguishable from other businesses in your state. Using your own name or the property address is a good approach.
Appoint a Registered Agent
Your LLC will need a registered agent on file in your state. This is a person or company responsible for receiving important legal and tax documents on behalf of your business.
Many entrepreneurs serve as their own registered agents when first starting out. Some states require the agent to be located in the same state as the LLC.
File Formation Documents
To make your LLC official, you must file Articles of Organization with your Secretary of State’s office. This form requires basic information about your business, including its name, address, members, and registered agent.
There is typically a filing fee under $100 due when you submit your Articles of Organization. Your LLC legally exists once the state processes and approves these formation documents.
Create an Operating Agreement
This document outlines important procedures and policies for your LLC, like ownership structure, member responsibilities, how profits and losses are divided, voting rights, and rules for buying/selling ownership interest.
Having an Operating Agreement is recommended for any LLC, especially those with multiple members. But it is legally required in some states.
Get an EIN from the IRS
To open a bank account and file taxes for your rental property LLC, you need an Employer Identification Number. This nine-digit number serves as your business’s Social Security Number for interacting with the IRS.
EINs are free and easy to obtain from the IRS website. As a single-member LLC, you can skip this step since your Social Security Number functions the same as an EIN.
With those steps complete, you have formed an LLC for your rental property. Make sure to stay compliant with all ongoing legal and tax requirements for your LLC.
Tax Differences: LLC vs Personal Rental Property
Many real estate investors form an LLC to obtain tax benefits compared to owning property personally. But watch out – there are no special tax breaks applied just for using an LLC.
Taxation of Personal Rental Property
- Rental income taxed at your personal income rate
- Can deduct mortgage interest, taxes, repairs, etc.
- Depreciation deduction available
- Can deduct any rental property losses
Taxation of Rental Property in LLC
- Income and expenses pass through to your personal return
- No separate taxation for the LLC itself
- Take same deductions as personal rental property
- Subject to self-employment taxes
So there is no inherent tax advantage to holding real estate in an LLC compared to personal ownership. The same income and deductions apply.
The LLC just gives you liability protection and other benefits. But it does not change how rental profits and losses are treated at tax time. An LLC is about reducing legal risk, not taxes.
Some investors think putting their property into an LLC will exempt it from certain taxes. That is not the case. Talk to a tax professional to understand the tax implications before forming your real estate LLC.
Rental Property LLC vs S-Corp: What’s the Difference?
LLCs and S-Corporations provide owners with personal liability protection. But they have some key differences related to formation, ownership, and taxation.
- More flexibility in ownership and management structure
- No limit on number of members
- Less required corporate formalities
- Pass-through taxation is default
- No ownership restrictions
- Strict limitations on ownership structure
- 100 shareholder limit
- More required corporate formalities
- Must file special S-Corp election
- Restrictions on non-U.S. ownership
For most real estate investors, an LLC offers more benefits than an S-Corp in terms of simplicity, flexibility, and pass-through taxation. But talk to your accountant to determine if the structure of an S-Corp better aligns with your goals.
No matter which ownership structure you choose, be sure to consult tax and legal experts familiar with real estate investing to ensure you receive proper advice.
LLC for Rental Property: The Bottom Line
Forming an LLC around rental real estate activities provides major advantages compared to personal ownership. Limiting liability, accessing business credit, organizing finances, and gaining credibility are just some of the benefits.
But an LLC does not automatically reduce your taxes. The income and deductions related to a rental LLC are reported on your personal tax return. An LLC provides legal and operational benefits, not special tax breaks.
For real estate investors, the liability protection of an LLC is a major incentive to operate rentals under a formal business structure. LLCs also allow for more flexible and scalable ownership of multiple rental properties.
Just be sure to obey all formation, documentation, and compliance requirements that come with LLCs. Get help from legal and accounting professionals to ensure your company avoids any missteps.
With the proper setup, an LLC can be an invaluable asset protection and management tool for rentals. Take advantage of the unique benefits LLCs offer to real estate entrepreneurs.
Frequently Asked Questions
Can I deduct rental property expenses if the property is owned by an LLC?
Yes, placing your rental property into an LLC does not prevent you from taking tax deductions on expenses related to the rental. In fact, with an LLC there may be additional deductions available beyond what you could deduct for a personally owned property.
Does rental income get taxed differently in an LLC versus personal ownership?
No, there is no difference in how rental income is taxed whether you own the property personally or in an LLC. The rental profits pass through the LLC to your personal tax return, so your individual income tax rate applies either way.
Should each rental property have its own LLC?
Forming a separate LLC to hold each individual rental property you own provides the maximum liability protection and organizational benefits. It also allows you to sell one property in the future without impacting other holdings.
Can I manage my LLC rental properties myself?
Yes, you do not have to hire a property management company just because your rentals are owned by LLCs. As the member of the LLC, you can still handle management responsibilities yourself if you wish.
If I form an LLC, do I need to have a separate bank account for the rental income and expenses?
It is recommended to open a dedicated business bank account under your LLC’s name to keep its finances separate from your personal funds. Commingling funds can defeat some liability protections.