Key Takeaways

  • Using an LLC for rental property can limit personal liability, simplify ownership transfer, and offer potential tax advantages.
  • Investors can benefit from forming individual LLCs for each property or using Series LLCs where allowed.
  • There are important steps to consider when forming an LLC, including state registration, EIN acquisition, and operating agreement drafting.
  • Transferring property into an LLC may impact mortgage terms and require title and insurance adjustments.
  • Insurance alone may not fully protect investors from liability risks, reinforcing the value of an LLC structure.

LLC for Rental Property

Starting an LLC for rental property is a popular way of managing investment real estate properties. If you're thinking about investing in real estate and then renting one of your properties, you should consider forming an LLC or a limited liability company to hold the titles.

Explore Your Options for Forming an LLC

When an LLC is formed and operated correctly, the personal liability of the owners is limited. You can easily improve your chances of success by complying with applicable laws. However, many types of corporations and partnerships offer similar protections. 

You can form several different types of businesses, and an LLC isn't always the best choice. If the owner of any business doesn't comply with the laws and regulations that apply, he or she could be exposed to personal liability. For example, an owner could mix personal and business funds or fail to maintain a  registered agent, a third-party representative of the business. 

Steps to Set Up an LLC for Rental Property

To create an LLC for your rental property, follow these steps:

  1. Choose a Business Name: Ensure it's unique and compliant with your state’s naming rules.
  2. File Articles of Organization: Submit this document to the Secretary of State where the property is located.
  3. Obtain an EIN: An Employer Identification Number from the IRS is needed to open a bank account and file taxes.
  4. Create an Operating Agreement: This outlines the LLC’s management structure and each member’s responsibilities.
  5. Register for State and Local Taxes: Depending on your jurisdiction, you may need to register for state taxes.
  6. Open a Separate Business Bank Account: Keep finances for each property clearly separated to maintain liability protection.

How to Hold Property in an LLC

You should set up your LLC before you purchase the property you want to invest in instead of transferring the real estate to another lender. That way, you won't have to transfer your property or get a lender to consent to the transaction. Also, you'll know if you want to set up a separate LLC for each property or combine them after you buy three or four properties.

Having a separate LLC for each property works well to protect your assets for 10 entities or less. If you have more than 10 properties, place two or more properties in some of your LLCs. The easiest way is to form an LLC for the first few properties, then see how things go from there. That way, if a tenant slips and falls or sustains another injury, only one LLC will be liable, and the others will be protected, along with your personal assets.

Each LLC should have a separate EIN, or Employer Identification Number, and a different bank account number. If you have more than one property in an LLC, use your bookkeeper or property manager to take care of your income and expenses. If you have more than one LLC, you can easily compare profits and expenses as long as you keep your books organized. Income and expenses usually stay in a separate bank account for each LLC.

Holding Property in Specific LLCs

Several different asset classes of LLCs are available.

  • Some states allow Series LLCs, which are an effective way to keep the chaos of multiple LLCs organized. After all, 15 or 20 LLCs can be hard to keep track of.
  • If you're wholesaling properties, you can run an entire business under a wholesaling LLC.
  • You can also put two or three low-income houses in one LLC. However, you should place nicer, more expensive rental homes in their own separate LLCs to reduce your liability.

Consider Financing, Fees, and Annual Registration

If your state has high filing fees and high annual renewal fees, then setting up lots of different LLCs could be very expensive. Also, mortgage rates are usually higher than for personal mortgages because banks consider LLCs commercial loans, even when the property is zoned as residential. You should call your bank to make sure they lend to LLCs. 

Most banks require owners to personally guarantee loans, so they can go after their personal possessions if payments are late. Commercial loans have different departments at banks and different qualification requirements than personal loans or mortgages. Forming your LLC is best in the state where your property is located.

How an LLC Affects Taxes on Rental Property

LLCs are pass-through entities for tax purposes, meaning profits and losses are reported on the owner’s personal return. However, owners can elect corporate taxation (as an S or C Corp) for specific tax strategies. With an LLC:

  • Rental income is typically taxed as passive income.
  • LLCs can deduct business expenses like maintenance, property management, and insurance.
  • If formed with multiple members, the LLC must file a partnership return (Form 1065).
  • Single-member LLCs file rental income on Schedule E (Form 1040).

LLCs vs. Liability Insurance

For many investors of real estate, forming and maintaining a company isn't worth the possible threat of a lawsuit, particularly when inexpensive liability insurance is available. However, real estate investors who only rely on insurance are taking a big risk. Liability policies often have exceptions, limits, and carve-outs. The chances of a loss that goes over policy limits are remote, but the consequences could be devastating.

How to Transfer Title to an LLC

The title to a property is a collection of rights that outlines its ownership in property law. Titles are also formal documents called property deeds that serve as evidence of ownership. If you bought a property as an individual, then the property deed will have your name on it. However, if you form an LLC, you'll need the company name on it instead. 

If you're the title holder, you can transfer ownership to the LLC by creating a Quit Claim Deed and filing it at your local County Clerk's office. That way, you can edit information on deeds that have already been recorded.

Pros and Cons of Using an LLC for Rental Property

Pros:

  • Limits personal liability.
  • Easier to manage multiple properties (especially with Series LLCs).
  • May simplify transferring ownership.
  • Enables clear business expense tracking and tax reporting.

Cons:

  • Startup and annual maintenance fees.
  • More paperwork than personal ownership.
  • Can trigger mortgage renegotiation or higher commercial loan rates.
  • Complexity increases with each additional LLC.

What to Know About Insurance and Mortgages

After transferring your rental property into an LLC, you may need to:

  • Update Insurance Policies: Notify your provider to change the insured party to your LLC.
  • Check Mortgage Terms: Some lenders require prior approval before a title transfer, as it may violate the due-on-sale clause.
  • Consider Commercial Insurance: This type of policy may be necessary to cover the increased liability exposure for business-held properties.

Frequently Asked Questions

  1. What is the main benefit of using an LLC for rental property?
    The primary benefit is liability protection—your personal assets are shielded if someone sues over issues with the property.
  2. Can I form an LLC after purchasing a rental property?
    Yes, but you'll need to transfer the title from your name to the LLC, which could affect your mortgage and insurance.
  3. Is one LLC enough for multiple properties?
    It depends on your risk tolerance. Some investors use one LLC per property to isolate liability, while others group lower-value properties in a single LLC.
  4. Does an LLC change how my rental income is taxed?
    No, unless you opt for corporate taxation. LLC income typically passes through to your personal tax return, reported on Schedule E.
  5. Can I get a mortgage under an LLC?
    It’s possible, but expect stricter terms, higher interest rates, and personal guarantees since LLCs are considered higher risk by lenders.

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