By Are you new to this LLC world? Undoubtedly, it has been popular worldwide for tax advantages, incredible business flexibility, and protection of personal assets.
There are a lot of LLC-related questions I receive often. Among them, the most popular one is, “Should I put my rental property in an LLC or not?”
I will explain this question in detail here. You will get a lot of additional information you must know while putting rental properties in an LLC.
Let’s get into the business directly!
A Limited Liability Company (LLC) is the ultimate legal entity to protect business owners from liabilities.
Not only that, but it is also famous for some other business facilities. It can offer you the flexibility and tax advantages of a partnership or sole proprietorship. You can avoid legal taxation issues while maintaining a more transparent business system.
However, the LLC formation system will differ from state to state.
Should I Put My Rental Property In An LLC?
First of all, you can certainly put on rental properties in an LLC.
However, The question stands: “Do I Need An LLC for My Rental Property?” The answer is “NO”.
As an expert, I recommend that you not put it on LLC. Although there are several factors, you have to check before making a precise decision. I believe land trusts are a better pick here for rental properties.
Things you need to check while putting rental property on LLC:
- Tax impacts on your business
- Lender’s approval
- Potential liability exposure
Still, some people recommend S corps are better than LLC for rental properties. If you don’t have any other option except these two, go for LLC. It can provide more protection of your liabilities and flexibility and avoid double taxation hassles.
When Should I Start an LLC for a Rental Property?
You can start an LLC for a rental property anytime, but there are a few factors to consider while creating an LLC for rental property.
Most people recommend it before you purchase a rental property. This can help you protect yourself from lender issues. Also, you will be getting rid of date and resign-related issues.
If you already own a rental property and want to put it into an LLC, this is also possible.
It’s important to remember that forming an LLC has legal and administrative requirements. Some requirements include filing paperwork with the appropriate government agency and potentially incurring additional costs.
Consulting with an attorney or tax advisor can help you determine the best timing regarding your business.
How to Create an LLC for a Rental Property? : Quick Check
If you are sure that you want to set up an LLC for your rental property, give a quick check to the following steps here:
Get all the information from your lender: Contact your lender and ensure the property is mortgaged. You should also discuss title transfer and all other requirements regarding this.
Select the business name: Choose an available business name for your LLC. You can take advice from an expert (attorney/ CPA).
Do the drafting and complete registration: You must complete the required LLC drafts. It will need all the basic information about your business and LLC. You will also have to open an agreement to operate an LLC.
Get your EIN (employee identification number): You can get it from the IRS. They will give you a nine-digit number online.
How Do You Name the LLC for Your Rental Property?
Well, most states have a set of rules of naming LLC for rental properties. You should check what your state has to say. It is the prior stage to avoid any type of mistake.
Also, there has some common things to consider before naming:
- Try to keep the names short and simple.
- Don’t try to make it very unique. It is better to keep everything basic.
- Go for formal names that are easy to pronounce.
Advantages & Disadvantages: Putting Rental Properties On LLC
Wait! I understand you still are not clear on the topic.
No issues; here, I will discuss the advantages and disadvantages of using LLc for rental properties. Read it carefully, then decide what you want!
Advantages of Getting LLC for Rental Properties
- LLC will protect your personal assets
- Single-meme
- ber LLC as well as multi-member LLCs both are allowed
- A pass-through entity for taxation is ensured
- Foreign members are allowed as well
- LLC can pay reasonable interest to members on loans
- Easy to transfer interest
Disadvantages of Getting LLC for Rental Properties
- LLCs can not give you 100% protection from lawsuits
- Setup costing is quite high( Sometimes near to $500)
- Member turnover is quite difficult
- Financing on LLC-owned property is tough
- Transfer tax liability risk
- Triggering due on sale clause after transferring
- Self-employment tax is needed
- Additional tax filings may raise the cost and paperwork hassle
By comparing the advantages and disadvantages, LLC-owned rental properties get limited benefits. It might not even be an ideal suite for larger partnerships.
What Is the Cost of Starting An LLC For Rental Properties?
Putting your rental properties together means you have to create an LLC system.
It might vary depending on some other factors. These are registration fees of your LLC, payment for notice publication, agreement creation fees, tax transfer fees, and finally, filing fees.
The entire cost of all of these will vary depending upon which things your state wants and which are not required.
Factors | Costs |
|---|---|
LLC registration | $50 to $630 |
Notice publication | $40 |
Agreement operation | $1000 or less |
Title Transfer Taxation | Depends upon % of transfer |
Filing Fees | $10 to $50 |
Things To Consider Before You Put Rental Properties On LLC
If you have finally decided to put your rental property on an LLC, there are certain things you must consider. Have a quick check:
- Forming an LLC involves certain costs and some ongoing fees. Consider the financial and administrative burden associated with creating and managing an LLC.
- While an LLC can provide some tax advantages, consult with a tax professional. Sometimes, the tax benefits may need to be more significant to bear the costs and complexities.
- If your rental properties have existing mortgages, transferring them to an LLC may trigger due-on-sale clauses. It might require immediate payment of the loans. Regarding that, you need to revise insurance policies to ensure coverage under the LLC structure. Discuss these considerations with your mortgage lender and insurance provider.
- Each state has its regulations and requirements for LLCs. Research the laws and rules applicable in your state regarding formation, taxation, ongoing compliance, and other relevant factors.
Alternative to an LLC for Rental Properties
One alternative to an LLC for rental properties is to form a real estate holding company. A real estate holding company is a business entity specifically created to hold and manage real estate properties.
The main difference between an LLC and a real estate holding company is that the real estate holding company is solely focused on managing properties. In contrast, an LLC can be used for various business purposes.
Frequently Asked Questions
Well, you can do it. However, this is not recommended/ Mixing your personal account with rental income put under an LLC is never a good idea. You better create a separate account to manage the rental finances solely.
You can pay yourself from an LLC in four ways. These are W-2 employees, through profit distribution, as independent contractors, and by keeping the bucks in the business as a form of investment.
It is not necessary to have a separate LLC for each property, but it can provide certain advantages depending on your situation and goals. Most people prefer to separate LC for liability protection, organized financial factors, selling strategy, and cost benefits.
