LLC For Rental Property Pros And Cons: Everything You Need to Know
There are many LLC for rental property pros and cons, and it is important for you to weigh both the benefits and disadvantages to operating a rental property LLC before you choose to form your business.3 min read
An LLC, or Limited Liability Company, is a hybrid business structure that combines the limited liability benefits of a corporation and the tax features of a partnership. Owners of an LLC are referred to as members, and an LLC can be either a single-member or multi-member LLC. Also note that LLCs are regulated at the state level, so the rules and regulations regarding LLCs differ by state.
Rental Property LLC: An Overview
If you have investment property that you want to rent out, then you might want to form an LLC to cover such oversight. LLCs came into existence around 1977, when the State of Wyoming enacted legislation to accommodate the needs of oil companies. However, prior to the establishment of LLCs, real estate investors were forced to create corporations, and oversee their rental properties through these corporations. Due to the limited liability and tax benefits, owning investment property through an LLC is attractive for most.
Rental Property LLC: Advantages
Rental property LLCs offer many benefits, which is why LLCs are so popular in most states. Some of these benefits include:
• Limited liability
• Pass-through tax advantages
• Potential to deduct mortgage interest and rental income
• Greater flexibility, i.e. distribution of profits and transferring interest rights
• Cheaper state registration fees
If you have more than one rental property, you should create an LLC for each one. This is because if a lawsuit is brought against the LLC, only those assets of the LLC will be at stake. Therefore, if you create one LLC for multiple rental properties, then all rental properties are at stake in a lawsuit. However, your own personal assets will not be at stake as LLC provides limited liability. This means that your personal bank accounts, car, home, etc. will not be at risk.
Another advantage of an LLC is the pass-through taxation. Unlike C corporations, LLCs are not subject to double taxation as the profits and losses of the LLC are passed through to the members, who then report it on their personal tax returns. This also allows the owner to avoid double taxation on both the rental income and appreciated value of the rental property once it is disposed of. Furthermore, a single-member LLC owner can deduct the mortgage interest similar to that of a sole proprietorship.
With regard to multi-member LLCs, each member will report a specific portion (up to the amount of money each member put into the company) of the LLC’s business income and losses on their personal tax returns.
Other benefits of operating an LLC are that LLCs offer greater flexibility than corporations and partnerships. Furthermore, LLCs might pay less state registration fees than corporations. LLCs can also provide flexibility in terms of distributing profits, which are determined in the operating agreement.
LLC members can transfer their ownership interest by simply giving the interest to heirs. In this case, a new deed need not be recorded, and no amendments need to be filed. This is what makes owning rental property through an LLC favorable.
Rental Property LLC: Disadvantages
While there are many benefits to operating a rental property LLC, there are some disadvantages too, including the following:
• Higher costs to setup the LLC
• Ongoing maintenance costs
• Asset protection is not guaranteed
In addition to the setup costs of forming an LLC, there are ongoing fees and other costs associated with the maintenance of your LLC. While the actual state registration fee might be cheaper for LLCs, other maintenance fees could add up quickly. Be sure to visit your state’s Secretary of State website to find out what fees are associated with forming your LLC, along with annual and other ongoing fees.
Asset protection is not guaranteed, and in certain circumstances, plaintiffs might be able to pierce the corporate veil and hold a member(s) liable for the debts and obligations of the LLC, particularly in the case of fraud.
If you need help forming a rental property LLC, or want to obtain additional information regarding establishing an LLC, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5-percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with, or on behalf of companies like Google, Menlo Ventures, and Airbnb.