Using an LLC for a rental property can also enhance credibility with tenants and lenders, potentially making it easier to secure financing and attract high-quality tenants. It also simplifies the management of multiple properties, allowing owners to consolidate them under one entity for more straightforward administration and record-keeping. Overall, an LLC combines liability protection, tax benefits, and operational ease, making it an attractive choice for rental property ownership.
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?
LLC is short for a limited liability company, 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.
LLC for Rental Property Advantages
- Asset Protection
- Less Liability
- Tax Benefits
- More Business Opportunities
1. Asset Protection
An LLC separates your assets, and it can protect you from lawsuits. 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 improves their chances of keeping other assets should one of their properties go bankrupt.
2. Less Liability
Having an LLC for your rental property will reduce your liability in the event you are sued and a judgment is issued against you. 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.
3. Tax Benefits
There are also tax benefits to having an LLC for your investment property. With an LLC, you get the benefit of pass-through taxation rather than being double-taxed for the rent payments you receive. LLCs also make it easier to claim business expenses, which, in turn, makes it easier for you to determine your earnings.
4. More Business Opportunities
Having an LLC can also allow you to use new services that are strictly limited to businesses. Being able to receive rent through credit card payments or getting rent through e-payments, for example, can become a reality with an LLC.
Can I Make an LLC If I Already Have a Loan for My Rental Property?
Yes, you can make an LLC if you already have a loan, 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?
Yes, you can buy a house with an LLC and 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 to Form an LLC for a Rental
Contact Your Lender
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.
Choose a Business Name and Create the Articles of Organization
Choose a business name and create the Articles of Organization (AOC) for your company. Your AOC is a form that shows how your company is structured and gives the government basic information about your business.
File a Notice of Intent (If Required)
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, so check your state's requirements.
Obtain Necessary Licenses and Permits
Next, you will need to get all the licenses and permits you need for your LLC. This can vary from state to state, so be sure to research the specific requirements in your area.
File for an LLC
Then, file for an LLC. This will include paperwork that can cost anywhere from $50 to $800, depending on where you live. Make sure to follow your state's specific filing procedures.
Transfer Property Titles and Create a Separate Bank Account
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.
Update Your Rental Leases
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?
You should form an LLC 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.
LLC for Rental Property Drawbacks
1. Costs
The costs associated with forming and maintaining an LLC can be a disadvantage for small-scale or short-term property investors. Annual fees, filing costs, and potential legal fees can add up, making it less appealing for those with limited resources or a small number of properties.
2. Tax Considerations
The tax advantages of an LLC may not always outweigh the benefits of other business structures, especially for single-member LLCs taxed as sole proprietorships. In some cases, other structures, such as S Corporations, might provide more favorable tax treatment, particularly regarding self-employment taxes.
3. Complexity and Administrative Burden
Managing an LLC involves keeping detailed records, maintaining a separate bank account, and ensuring compliance with state-specific regulations. For those not prepared to handle these responsibilities, the operational complexity might outweigh the benefits.
4. State-Specific Financial Burdens
In states with higher filing fees and annual taxes, the financial burden of maintaining an LLC can be significant. In such scenarios, alternative ownership structures might be more cost-effective
LLC for Rental Property Bottom Line
Forming an LLC for your rental property can provide significant benefits, including liability protection, tax advantages, and increased business opportunities. It’s a strategic move that many landlords find invaluable for protecting their personal assets and optimizing their rental business operations. However, it’s essential to consider the associated costs, administrative responsibilities, and specific circumstances that might make an LLC less advantageous. Consulting with legal and financial advisors can help ensure you make the best decision for your rental property investments.