Should Landlords Set Up an LLC for a Rental Property?

Written on August 10, 2015 by , updated on September 6, 2017

create an LLCIf you own rental property, you’ve probably wondered about forming an LLC, a limited liability company.

Although there isn’t one answer that applies to all landlords, there are some compelling reasons to form an LLC and some reasons not to. Once you understand the basics, it’s still a tough decision to make. But you’ll at least be more knowledgeable when consulting with your financial advisor.

LLCs Protect Your Assets

The main reason people set up LLCs is to protect their personal assets. An LLC shields you personally from being sued, though your company could still face litigation.

For example, your tenant’s drunken friend falls down the stairs and got hurt. You’re the big pocket in this scenario. When the friend sobers up, he figures he can sue you on some trumped-up reason. If that happens, you’d be named in the lawsuit and would have to defend your own personal assets.

If your property were under an LLC, however, only the LLC’s assets would be under attack.

Lots of Tax Stuff to Know

LLCs have “pass-through taxation,” which means that the LLC itself doesn’t pay any taxes. Any income made passes to the LLC’s owner or owners.

If you are the only owner of the LLC, you would report your taxes the same way you probably do now, assuming you’re a sole proprietor. That simply means you own rental property but are not a legal entity.

If your LLC has more than one owner, such as you and your spouse, the LLC files a separate tax return. And that could cost you extra money if you use a professional to do your taxes.

You can set up an LLC as an S corporation or as a C corporation, perhaps to reduce taxes if you pay self-employment taxes.

How you’d set up your LLC and whether you should set one up at all for tax purposes are matters to discuss with your tax advisor who can help you determine which setup, if any, would benefit you most.

LLCs Aren’t Free

A good reason to not set up an LLC is that is costs money to do so. You can set up an LLC with your local State Corporation Commission, and pay a small registration fee (usually $50-$150).

Or, you can hire a services company such as LegalZoom, which should cost you several hundred dollars when all’s said and done.

If you have an attorney set one up for you, you’ll probably pay between $1,000 and $2,000.

Also, some states charge either annual fees or taxes in addition to the setup costs, and that could be a deal breaker for you. For example, California has a relatively inexpensive filing fee, but then it charges some hefty taxes each year. You would need to check what the fees and taxes for your state are.

Insurance Also Protects Your Assets

If you have rental property, you should have landlord insurance, called a dwelling policy. This protects your rental property, and depending on your policy, it pays either cash value or replacement cost if catastrophe strikes.

You can also add loss of rental income to the policy. And you can get umbrella insurance on your dwelling policy to protect you from being sued.

The catch is that your insurance might not cover the total costs you incur. If that happens, your personal assets are at risk. Not so if your rental properties are protected under an LLC.

Moving an Existing Property with a Mortgage

If you already have a house you rent out, and you carry a mortgage on it, you might not be able to move that house to an LLC easily. This looks like a sale to the lender who might call in your mortgage, called a due-on-sale clause. You might lose out on your low-interest rate when you refinance, or you might not qualify for a mortgage anymore, depending on your circumstances, if that happens.

Keep Your Money Separate

If you do set up an LLC, be sure never to mingle your LLC money with your personal money.

If you head to the mall and use money from your LLC to buy a new outfit, or if you use your personal money to pay for a new garbage disposal for your rental property, a person suing you could claim that your LLC is not a separate entity. That could mean you lose your protection!

Related: 6 Ways to Avoid the Hidden Dangers of Co-Owning Property

Consult, Consult, Consult

As you can see, the issue of whether to form an LLC is complicated, and each landlord’s situation differs. Now that you know the basics, consult with your financial advisor, your CPA or your attorney to find out whether an LLC will benefit you.

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168 CommentsLeave a Comment

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  • Chris Gallagher

    Just a quick one for my circumstances. I’m a Brit and therefore Non-Resident Alien. In order to get a bank loan on the 50% of the property I have to be the personal guarantor. In order to be a personal guarantor I have to have an ITIN number. The only way the IRS will give me an ITIN number is if I can prove that I will earn income from the US in advance of applying. By setting up an LLC I automatically get an EIN number as a director, I then get an ITIN and all the dots finally connect. From my experience the only way rental property is possible for Non-Resident Aliens is either having the property 100% paid up- up front – or getting the ITIN number through the LLC.

  • canoe grebel

    I am thinking of purchasing a new home, our third home, and renting the other two but do not want the new home in our name to protect others from finding out we own this home. Can we get a mortgage using an LLC for the new home? Will our name be tied to the home?

    • Fabrice Dejean, CA

      You are the managers of the LLC. Yet an LLC does not pay taxes. The endeavor in transferring real estate to a separate entity to protect it , is, at first sight, understandable, but collecting rents seems however to be surpassing the limitations of an LLC ownership structure, that does not declare income. Legally speaking, if any income were to be generated, it would have to be declared. It’s then entirely up to you to find how you wish to adequately report your income as landlords. In my opinion, transferring legal ownership of a rental to a limited liability company seems insufficient in consideration of the insurance, tax, liability, and income reporting requirements, which you must show to the world, as landlords.

    • RapidRealm

      If you want to hide the ownership of a property, you probably want to consider a trust. It’s very easy to look up the members of a LLC since it is public information with your State government. Having a mortgage would also enable someone to figure out who’s paying it. It’s pretty straightforward to connect the dots. Seems you should take a bigger mortgage on the first 2 homes and pay cash for the 3rd.

  • Maggie Maccario

    Our LLC owns a property in DC, we will have it rented soon, all income will be deposited in the LLC account, can the income form rental after all expenses for property have been covered, be distributed to the members of the LLC or not? Thank you!

    • phil wallace wallace

      Hello does anyone reply to these great questions?

    • Jeffrey

      Maggie:

      I too have a property in DC which I am converting to a rental. My travail is whether to create an LLC, which puts you under the Rent Control and other DC housing laws which favor the tenant, or sole proprietorship, which is exempt from Rent Control, etc.. What made you decide on an LLC?

    • RapidRealm

      The short answer is YES. LLCs are pass-through tax entities which means all net income must be declared on the members tax returns for that year.

    • Erika Veit

      Yes, the profit can be taken out as cash and transferred to your personal account (a separate account) for use as income. In that case, you would have a business checking account under the LLC to deposit rents and pay bills for the LLC property. Then take the profit out when you’re ready.
      It also a good idea to keep a book/ledger on your LLC to keep track of tax-deductible expenses, and to keep a Profit/Loss statement for each month. I own a multi-family under an LLC and this has worked well for me.

  • Cece

    This article neglects one of the major disadvantages of LLCs for landlords—they are required to hire lawyers to evict in some states, and cannot file pro se.

  • Fabrice Dejean, CA

    I still don’t understand how an LL C would protect YOUR assets, in case a tenant sued you and wan the case, unless in the circumstances under which YOUR tenant had no idea that YOU weren’t in fact the owner, and had no money to garnish or asset to levy. If a tenant knew your were not the owner, why would a tenant sue you, or paid rent to you? Also, I don’t understand how an LLC is a separate entity, but YOURS at the same time?

    • RapidRealm

      A LLC is a separate legal entity you create with your State. You become the single member/manager of the LLC. The property is owned by the LLC, not you personally. The contracts, rent collected, insurance, taxes, bank accounts and expenses are all transacted through the LLC, not you personally. If the tenant were to sue, they would would sue the LLC. The assets of the LLC are at risk, mainly the rental property.

      • renata Wong

        To protect the asset if you have more than one rental is to set up LLC for each one . This way if someone sue the owner they can only get up to that property value instead to have all your properties under one LLC.

  • Lori

    Hello all, so I have a 2 family home in which I reside in 1 unit and rent out the other. The rental income does not cover the mortgage entirely, so I was thinking about making the home an LLC, does this benefit me? As far as my personal property I understand it does but I need to know if I should or shouldn’t? Not sure I bought the home about three years ago….. any advise

    • RapidRealm

      On the surface, it doesn’t appear appropriate if you live on one side of a 2-family. There are lots of factors, including your personal assets, your risk profile, insurance coverage, tax consequences and extra paperwork. A property owned by a LLC that is sold cannot claim the primary residence exemption. It has to pay capital gains tax on any gain. You need to weigh all the factors in order to decide.

      • Jim Martin

        Would like to set up LLC, however, I have mortgages on 5 (of 6) houses. Do I need to contact mortgage company first in order to approve move to an LLC? Some houses in my name, some in my wifes name, one house with both. How likely will mortgage co allow this move to LLC?

        • RapidRealm

          In order for you to get protection via a LLC, the LLC must own the properties and not be owned by you or your wife. That means you have to “sell” (or transfer) the property to the LLC. In order to sell, the property’s title must be clear and all liens, including mortgages need to be paid off. Most mortgages are not assumable so you can’t “move” the mortgage. The downside is that it is difficult for the newly created LLC to obtain a mortgage since it has neither a credit history nor an income history.

        • Andrew Walker

          In order to move the real estate into an LLC. you do not need to “sell” it. You can do a quit claim deed which is different then a sale and does not require any existing mortgages to be paid off. However you should definitely still contact your lender prior to moving forward with the transaction and get their approval. If you have been paying on time the lender absolutely does not want to call in the loan or foreclose on the property, they will want to work with you.

          • RapidRealm

            To Andrew Walker: a quit claim deed is a transfer of property from one owner to another (effectively a “sale”). Most mortgages have a due-on-sale or an acceleration clause if there is a transfer of ownership. There is often a difference between a mortgage for a real person versus a business entity (LLC) and not all lenders will write a mortgage for a business.

  • Fran

    Can I set up an LLC to manage a property oversea (France)
    Can it use a foreign bank account?

  • Amanda

    My husband owns 2 homes that we rent out. We intend to put each house in its own LLC in the future. Until then, they are both only in my husband’s name.

    Initially, I thought it was a good idea to setup an LLC and a bank account to track all income from both of the rental properties. But I put the LLC in MY name only. Almost acting like a management company who creates the leases and collects rents on his behalf. I’m not taking any fees or income.

    Last year we filed taxes jointly and just did a 1040 Schedule E. Is it an issue that I own an LLC that looks like it has money flowing in and out from the 2 properties (that i don’t own) but I’m not actually doing any type of 1040 Schedule C on our taxes? Can I leave it how it is?

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