LLC for Rental Properties

Benefits of having an LLC for your Rental Property

Personal Liability Protection

No business comes without risks, and that is especially true for anyone with a rental property business. Appliances break down, pipes leak, and accidents and injuries can happen no matter what kind of property you are renting out.

If something goes wrong and you find yourself facing possible liability issues, making sure that the business is its own legal entity is key. Registering the business as an LLC helps protect your personal assets, both legally and financially.

Pass-Through Taxation

One of the major distinguishing features between corporations and other entity types is double taxation. A company’s income is taxed once at the corporate level, and then when shareholder distributions are made or employees are paid, the same funds are taxed again at the personal level. 

An S Corp election allows you to avoid double taxation. Instead of being at both levels, income is “pass-through” to shareholders, who then pay taxes only once at their personal income tax rate. This allows small businesses to keep the legal protections and financing options that your standard corporation has while only paying taxes once.

But what about LLCs? They already have pass-through taxation as a major feature. For some LLCs, an S Corp election can actually provide tax benefits, particularly if the LLC operates an active high-volume business and the members have to shoulder higher payroll taxes. 

Separation of Business and Personal Property

Under state and federal law, properly established business entities are distinct from their owners, members, directors, officers, and employees. This means that the entity can own property, open bank accounts, and generally keep any personal assets separate from the business’s. This separation can help the LLC’s activities from affecting your personal assets in a negative way. 

Steps for Forming a Rental Property LLC

If you’ve decided on an LLC as your business structure, you need to know that LLCs are formed at the state level. Because of this, the formation process can vary depending on the jurisdiction. We can help create your LLC for you in minutes. Just use our LLC Formation Service.

To create one yourself, here are the steps that most looking to form an LLC will follow:

Step 1: File Your Articles of Organization

To start an LLC, you must file its official formation document with the state. In many states, this filing is known as Articles of Organization, but also might also be referred to as Articles of Formation, a Certificate of Formation, or a Certificate of Organization. 

Most states allow (and prefer) that this be done through their online filing platforms. We can take care of this for you with our LLC Formation Service.

Step 2: Transfer Property Title to the LLC

To receive the liability benefits of an LLC, you need to make sure that the LLC officially owns the rental property. You can either buy property in the LLC’s name, or transfer ownership of property you already own to the LLC. To do this, you must record the change in ownership via written deed, and then record the new deed by filing it with the county, city, parish, or township clerk’s office. Where you need to record the deed and the requirements for doing so depends on what state you are in, so check out our individual state pages on LLC rental formation for more specific information.

It’s important to remember that depending on the state, you may also be subject to a deed transfer tax. Also known as a realty transfer fee, a deed transfer tax is calculated based on the property’s fair market value multiplied by that state’s particular tax rate. Each state also has a number of exemption categories that allow transfer of property to take place without being taxed, so check with your state’s business services office to see if your transfer qualifies.

Step 3: Inform Lenders

Many properties also have outside financing in the form of loans and mortgages. If you’re transferring a mortgaged property to your rental LLC, you need to change the mortgage paperwork to reflect the new ownership. The terms and rates of the mortgage or loan may be altered based on these changes, as well.

If you form your rental property LLC before seeking a loan or other financing, you can make this process much easier.

Step 4: Update Lease or Rental Agreements

This is only a concern if you have tenants living in your rental property before forming your LLC. Any lease or rental agreements should be changed to reflect the LLC’s ownership of the property, and you need to notify current tenants about the changes in very clear terms.

Series LLCs and Rental Property Ventures

A series LLC is a unique form of LLC in which the founding documents specifically allow for unlimited segregation of membership interests, assets, and operations into independent sections known as series. This allows real estate investors to separate different properties and minimize liability and financial fallout should one part of the venture run into trouble.

Series LLCs are fairly new, and only a handful of states currently allow formation. They are:

• Delaware
• Illinois
• Iowa 
• Nevada 
• Oklahoma 
• Tennessee 
• Texas 
• Utah

The U.S. territory of Puerto Rico also allows Series LLC formation. Some states may not allow for formation of Series LLCs, but will allow those formed in other states to acquire foreign qualifications when they register. A good example of a state that allows this is California.

There are additional considerations and complications to analyze if you think a Series LLC is for you, so contact a legal professional in your state for more information.

Who should form an LLC for their rental property? 

Anyone looking to rent out property for income should consider forming an LLC, no matter what state they live in or how small the property is. LLCs provide the limited liability protections mentioned above, and involve far less corporate formalities and maintenance work than you would need with a corporation. Put simply, anyone and everyone looking to start their own rental property management venture should consider forming a rental property LLC.

Summary 

Starting a real estate LLC allows you to enjoy the benefits of a rental income while offering liability protection. If you’re a real estate investor or property owner looking to buy additional rental properties, creating a rental property LLC offers a variety of benefits as you grow your business.