Creating a Rental Property LLC in Tennessee

Benefits of creating a rental property LLC in Tennessee

Personal Liability Protection

The first benefit of LLCs is that they provide personal liability protection for their owners (also called members). Owning a rental property in Tenessee comes with some risks, and using an LLC structure can help insulate you from the personal liability risks.

Pass-Through Taxation

The next benefit that LLCs offer is tax-related. Unlike corporations and sole proprietorships, LLCs allow for “pass-through” taxation. LLC revenues are not subject to corporate tax rates. Instead, with pass-through taxation, an LLC owner pays taxes only once, at the personal level.

Separation of Personal and Business Property

Finally, the personal assets of LLC owners are clearly separated from the property of the LLC. The separation of business and personal property provides both legal and financial protection to the LLC owners. 

Series LLCs and other notes

Tennessee law also provides for series LLCs. Series LLCs allow real estate investors (and other business owners) in Tennessee to further divide the interests, assets, and activity of one operation into different sub-groups or “series.” Each series is considered a separate entity, with its own name, financial assets, and bank accounts. The most important advantage of a series LLC is that each series within the LLC is individually protected. This means that the assets of each series are shielded from any liability that stems from the activity of another series. A series LLC arrangement can be particularly helpful for real estate owners with multiple properties. 

Your property might also qualify for the FONCE franchise and excise tax exemption in the state, which has two criteria:

1. At least 95% of the entity’s ownership must be directly held by family members, and
2. Substantially all (66.67%) of the activity of the entity is either the production of passive investment income or the combination of the production of passive investment income and farming.

What to know before creating a rental property LLC in Tennessee

It’s critical that you understand the three key benefits of an LLC before you create your rental property LLC in Tennessee.

How to form an LLC for your Tennessee rental property

If you’re prepared to form a Tennessee rental property LLC, check out our Tennessee LLC formation service.

Step 1: Form Your LLC

1. Name your Tennessee LLC
2. Appoint a registered agent in Tennessee
3. Files Tennessee Articles of Formation
4. Create a Tennessee Operating Agreement
5. Apply for an EIN

Step 2: Transfer Property Ownership to Your LLC

However, you’ll need to take care of two additional issues if you obtained your rental property before forming the LLC. First, you’ll need to draft and file an updated deed showing the LLC as the property owner. Generally, you’ll want to file this deed with the local land records office. Second, be prepared to pay a tax when transferring Tennessee rental properties into your LLC. 

Step 3: Notify Your Lender

Also, make sure your lender is aware of the ownership change if you have financing on the rental property. Your lender might require you to complete additional documentation as you make the transfer. The transfer may also affect the financing terms and loan interest rate.

Step 4: Notify Your Tenants

Finally, if you are a property manager with tenants or renters, inform them of the upcoming transfer. Ensure all leases and rental agreements show that the LLC owns the property so that you can continue to earn rental income. 

Who should form a Tennessee LLC for their rental property?

It’s always a good idea to separate your personal assets from your business assets. For that reason alone, most property owners are wise to create a Tennessee real estate LLC. Starting a Tennessee real estate LLC is especially ideal for property managers that want to eventually expand their rental business and have multiple rental units. 

If you’ve decided to establish an LLC for a rental property in Tennessee, the ideal approach is to form the LLC first before acquiring rental property. By forming the LLC first, you can purchase the rental property as the LLC rather than yourself. This can help prevent additional paperwork down the road. Also, as a commercial real estate buyer, you may obtain better financing interest rates and terms.  

If you buy the investment property first and then create the LLC, be prepared for extra paperwork. First, you’ll have to transfer the rental properties from your ownership to the LLC. To do this, you’ll need to file a deed with the local land records office. Also, remember that you might trigger a tax event when you transfer your rental property to the LLC. Finally, transferring the property from your personal ownership to the LLC may impact your current financing arrangement. 

How we can help

No matter what stage your business is at, we’ve got resources for your needs. Maybe you want to streamline property management, form a real estate property LLC, or stay in compliance with state laws. Whatever your situation, we can help take your business to the next level. From forming a Business Plan to providing help with Worry-Free Compliance, we can give your business the boost it needs.