If you’re a landlord renting out a single-family home, an apartment building, or space for a business, you may have considered creating an LLC. Here are some considerations to go over if you’re thinking of creating an LLC for your rental property.
What Is an LLC?
A Limited Liability Company (LLC) is a simple way to structure your business to protect your personal assets. An LLC is a business structure that provides personal liability protection similar to a corporation with pass-through taxation of a sole proprietorship or partnership.
Setting up an LLC is fairly simple:
- The owner must choose a name that is different from an existing LLC in their state while also complying with state regulations
- The owner must file articles of organization with their state's corporate filing office
- A registered agent must be appointed
- Payment of fees
- Publish a notice of intent to create an LLC if required in your state
- Create an LLC operating agreement
LLC regulations vary by state, so check with your state for specific requirements.
What Are the Benefits of Creating an LLC for my Rental Property?
Here are a few key benefits of creating an LLC for your rental property:
1. An LLC limits your personal liability
LLC owners are protected from personal liability because LLC assets are used to pay off business debts. Let’s say your business can’t pay a creditor; that creditor cannot come after your house or car. In this situation, the creditor can only come after your rental property.
2. Pass-through taxation
In a corporation, the business is directly taxed and the owner may be taxed again when they profit from the business. With an LLC, income from your rental property is passed through directly to your individual tax return.3. Keep business separate
Creating an LLC can help keep your rental property separate from your personal assets. Additionally, if you have more than one rental property, you can keep them divided with separate LLCs. If someone files a lawsuit against your rental property, your other properties won’t be affected.
What Are the Drawbacks of Creating an LLC for my Rental Property?
Costs vary by state, but initial setup costs and annual maintenance fees can add up ($500 per year in some cases).
2. Asset protection isn’t guaranteed
An LLC can’t always protect you from potential lawsuits, hence “limited liability.” If your business and personal assets are not kept entirely separate, the court may take that into consideration if there’s a lawsuit.
3. Financing under an LLC may be more difficult
While it is possible to get financing for a rental property through an LLC, there are difficulties and limitations.
Creating an LLC for your rental property can help reduce your risk of liability, separate your personal assets from your business, and provide you with a pass-through tax benefit. You can still create an LLC after purchasing your rental property and you will just need to transfer the deed to the LLC.
Keep in mind that some locations may require the payment of transfer taxes which can be costly. If you financed the purchase of your rental property, your lender may not allow ownership by anyone other than the borrower.
Consult with a tax professional or legal advisor before deciding whether to create an LLC for your rental property.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure.
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