LLC For Rental Property: Do You Need One & Benefits

The PropertyClub Team
Jun 25th 2020
Do you need an LLC for rental property? Today we'll take a look at the benefits of setting up a limited liability company and answer common questions about this type of ownership.

Have you ever rented an apartment from a landlord or professional property management company? If so, you probably noticed that they asked you to send out checks that are payable to a company name rather than a landlord’s name. Usually, it’s also followed up by an LLC. Of course, this is by design. 

It’s becoming increasingly common to see landlords getting an LLC for a rental property. Believe it or not, doing this simple thing can make a huge difference in how landlords do business and how much taxes they’re on the hook for. If you have your own rental property, there’s a good chance that you’re thinking about doing the same. Here’s what you need to know about using LLCs for rental properties. 

What Is An LLC?

An LLC is short for Limited Liability Company. It’s a business structure that can be owned by one or more people. Having an LLC means that you work your rental properties as an entity separate from yourself. It also can have tax implications—such as making you a sole proprietorship or joint partnership. 

Do I Need An LLC For A Rental Property?

If you’ve recently bought a rental property of your own, you are probably wondering whether having an LLC is right for you. Limited liability companies are quickly becoming the standard business format for landlords, and rightfully so. That being said, it's not mandatory to have an LLC for a rental property that you own. 

Setting up an LLC for a rental property offers the following perks:

  • It separates your assets. Let’s say that something terrible happens on your property, and your tenant decides to sue you—or that you end up doing something that causes assets to be seized. An LLC will separate your assets, so you don’t have to cede them in court.
  • If you have multiple rental properties, having multiple LLCs can help protect the properties from being held liable as a group. This makes it easier for landlords to be able to keep potential losses low and also improve their chances of keeping other assets should one of your properties go bankrupt.
  • It reduces liability. When you have an LLC, people do not sue you directly. Rather, they sue your company, and there’s only so much they can sue an LLC for. LLC stands for Limited Liability Company, after all. 
  • When you have all your rental properties under your name, things get tricky for you in court. This means that people can sue you directly rather than the companies that you created. This can lead to massive losses.
  • It also makes taxes easier- Having an LLC helps give you the benefit of pass-through taxation, rather than being double-taxed for the rent payments you receive. LLCs make it easier to claim business expenses, which, in turn, makes it easier for you to determine your earnings.
  • Having an LLC also can allow you to use new services strictly limited to companies. Being able to receive rent through credit card payments or getting rent through e-payments, for example, can become a reality with an LLC. 

Though having an LLC for a rental property does come with many perks, it isn’t mandatory. So while it’s usually a smart move to get an LLC for your rental property, there’s nothing saying that you need to.  

Can I Make An LLC If I Already Have A Loan For My Rental Property?

Yes, but it’s not ideal. You will need to contact your lender to ensure that you can transfer your title to the LLC properly. Your lending terms may also change as a result of the rental property. 

Though it’s rare, there is a possibility that your lender will not allow you to transfer a rental property’s title to an LLC. If this is the case, you may need to talk with a tax attorney, an accountant, or a lending specialist to figure out your next step. 

Can I Buy A House With An LLC And Rent It To Myself?

In certain situations, it may make some financial sense to use an LLC to buy a home and then rent it to yourself. This can be doable; however, there’s a caveat. This often can ring alarm bells with the IRS, cause “phantom income,” and make your future tax revenues challenging to track.

The problem with self-rental is that it involves a lot of red tape. However, there are moments where it could make sense. For example, if your LLC bought a mall and you also own a small store in the mall, self-rental would not be a bad idea.

If you want to try self-renting, the best thing you can do for yourself and your business is to talk to a tax advisor. There may be easier ways to get the results you want without having to 

How Do I Form An LLC?

This varies slightly from state to state, but the general gist is that you will need to file paperwork with the state, name your LLC, and then explain how your company works. More specifically, here’s what you will need to expect:

  1. First, contact your lender to find out how you can transfer the loan’s title to the LLC. It may not always be possible, but if it is, they’ll give you requirements and also make sure that you know how to do it. If you don’t have a loan, you can skip this step.
  2. Choose a business name and create the Articles of Organization for your company. Your AOC is a form that shows how your company is structured and gives the government basic information about your business.
  3. If you are in a “Notice of Intent” state, you will need to file a notice of intent saying that you are starting up an LLC. This isn’t always necessary. 
  4. Next, you will need to get all the licenses and permits you need for your LLC. This can vary from state to state.
  5. Then, file for an LLC. This will include paperwork that can cost anywhere from $50 to $800, depending on where you live. 
  6. Transfer your rental property titles over to the LLC and create a separate bank account. This will help you ensure that everything is legal and that your tax filings will be easier to do later on. 
  7. Finally, update your rental leases. You need to make your tenants aware that you are now an LLC. You will also need to notify them about the right place to send in their rent checks. 

How Much Does An LLC Cost?

It can cost anywhere from $50 to over $800, depending on the state that you live in and the type of LLC you’re getting. Additionally, you should expect to pay annual fees to keep your LLC in place. 

When Should I Form An LLC For Rental Property?

Ideally, you would form it before you get financing for a rental property or shortly after. Doing so in the middle of a loan can be difficult and may require you to deal with a change in your financing schedule. 

Lending issues aside, there are a couple of other times when making an LLC makes a lot of sense. This includes:

  • You are just starting out as a landlord. The sooner you get into the habit of having an LLC, the better off you’ll be. 
  • You just got a second building. If you’re expanding, each building or complex should have its own LLC. 
  • You want to hire your own groundskeepers or maintenance crew. LLCs make the hiring process easier and also make recordkeeping just a little more streamlined. 
  • You are concerned about the possibility of a lawsuit. A lawsuit can cause you to go into bankruptcy, which may include losing your rental properties. If you’re concerned about litigation, getting an LLC can prove to be a smart way to protect yourself. 

Are There Any Times When An LLC Isn’t A Good Idea?

If you’re thinking about forming an LLC just so that you can rent from yourself, you might want to think twice. This can actually cause more losses than it helps avoid. If you find yourself in a very unusual tax situation, consult a tax lawyer before you make any moves towards an LLC. 

Conclusion

Getting an LLC for a rental property is usually a smart idea. Though it can cost a pretty penny to set up, the benefits of an LLC vastly outway the pitfalls. Their biggest strength is separating assets to help alleviate tax burden and liability, but they also can act as a convenient way to keep finances separate.

If you aren’t sure whether it’s for you or need help setting one up, contact a tax professional or an LLC creation company. They can help!