Setting up a landlord LLC can be tricky. If you're considering setting up an LLC for property you own and for which you are the landlord, you should consult with a qualified tax adviser first.

What is an LLC?

LLCs are business structures which you can create on your own or with other partners, called members. They are recognized as a pass-through entity. This means the business doesn't pay any federal income tax, the business's income is passed along to its members to pay individually. Members are also required to pay self-employment taxes. This differs from corporations.

They offer some flexibility in that you can also choose to be taxed as a C or S corporation, depending on your company circumstances. If you have high earnings, this might be more appealing, but you should discuss the options with a qualified tax accountant or financial advisor.

If you own the LLC by yourself, you file taxes just as you did before the company was formed. The property will likely be reporting profit and losses as a Schedule E on your personal tax returns.

An LLC with multiple owners will need to file a separate partnership tax return. For people who are married and don't want to file this way, you may need to have one spouse as the owner and the other listed with the right of survivorship. In the event you die, your spouse would then be the owner.

Forming an LLC can help protect personal assets and property if you run into issues with debt or legal issues with tenants. LLCs also make it easier for the property to be distributed once you pass away. A beneficiary would receive a certificate that shows their ownership stake in the property.

In addition to paying fees and set-up costs, you need to transfer the real estate to the LLC. And, you have to decide whether each property will have its own LLC or if multiple properties will be covered under a single LLC. Forming additional LLCs can help keep your liability separate between properties. Many banks prefer separate LLCs to keep one property from negatively affecting the specific property they are lending on.

Every landlord's situation is different, so it's best to check with a tax advisor before creating an LLC, especially if taxes are of concern.

Benefits of a Landlord LLC

One benefit is to keep your properties separate from each other. This keeps your rental liabilities minimized and personal assets protected. Other benefits include:

  • By setting up LLCs for each property, you essentially "insulate" them from liability claims.
  • Pass-through taxation that keeps the LLC from being taxed on income, like a corporation is subject to.
  • It's easy to separate expenses. You should create a business account immediately after setting up the LLC.
  • This helps with taxes, too, as it's easy to reconcile bank statements and see what expenses are business versus personal.
  • LLCs limit your personal liability. Without an LLC, your personal assets are at risk of attachment from a lawsuit.
  • Creating an LLC can make it easier to pass your properties and other investments on to your heirs. There is no need to transfer deeds or deal with a will, you just need to add members to the LLC and fill out some paperwork.
  • By placing property in a revocable trust, you can further reduce your personal risk, along with reducing estate taxes.

Potential Disadvantages

  • There may be issues moving an existing property with a mortgage to an LLC.
  • A mortgage lender could deem it a sale, causing you to lose out on your low-interest rate when trying to refinance.
  • It can be difficult to get a loan as many banks won't approve a loan for an LLC.

Special Circumstances with Landlord LLCs

The most common method of acquisition is to purchase the home on your own and then transfer it to the LLC. If you opt to sell or refinance down the line, you'll need to handle each title transfer separately, which can be an expensive and tedious process.

If you have property, you need landlord insurance, also called a dwelling policy. It protects the rental property and may pay out if there is a catastrophe. You have the option to add rental income to the policy, and you can also get an umbrella policy on the dwelling. Umbrella policies provide extra protection and there is additional coverage like for vandalism, fire damage, and flooding. No matter whether you form an LLC or not, homeowner insurance policies typically don't provide the protection landlords need.

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