Do I need an LLC for my rental property?

admin 0

LLCs and real estate seem to go hand in hand these days. Anyone you talk to who dabbles in real estate investing understands the need for liability protection, but they may not understand the proper way to protect yourself. Your insurance broker may have told you that a general policy will work, but I have a different opinion. Using an entity to hold real estate is a great way to protect yourself from liability, provide some tax benefits, and give you peace of mind that your personal assets are protected.

Many clients come to me before purchasing a rental property to understand all the ins and outs of real estate investing and how to protect themselves. Now, there are many different ways to structure a real estate investment empire, but I want to focus on using the LLC to hold ownership. An LLC, or Limited Liability Company, is a large entity in which to own property. The ease of formation and limited formalities that must be followed make the LLC a good choice for a real estate investor who wants to focus on finding deals, not handling paperwork. There are no board meetings, annual presentations, and cumbersome minutes that are written every month.

Another benefit of an LLC is the tax treatment. As a single-member LLC, there is no need to file additional federal tax returns unless a corporate tax election is made (outside the scope of this post), so the LLC is essentially taxed as a sole proprietorship on its individual return . If there are 2 or more owners, the LLC is taxed as a partnership (again, unless a corporate election is made) with the income and losses carried over to the owners’ individual tax returns. No double taxation.

Lastly, due to the ease of setup and administration, LLCs can be used to help spread liability risks among entities. Most of my clients place no more than 2-3 properties in 1 LLC, thus keeping the risk spread across the entities. For example, if a client has 6 properties owned by 3 separate LLCs and someone is injured on property 1, owned by LLC 1, that person will only be able to access the properties owned by LLC 1, barring special circumstances. If all 6 were owned by the same LLC, all of the principal in those properties would be at risk.

As you can see, LLCs are excellent vehicles for holding real estate from a liability and tax perspective. We have only scratched the surface with this discussion. If you would like more information on forming an LLC to own real estate and the do’s and don’ts, contact our office today at www.cozzalaw.com

Leave a Reply

Your email address will not be published. Required fields are marked *