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

  • Patrick

    “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.”

    Rental income is not taxed as self-employment income.

  • Mary B

    I just established an LLC in VA for a property (duplex) I own(no mortgage) in Phila, PA, for the purpose of protecting my assets. I will also set up a separate checking account for the property management company to deposit rent. Mgt Co will only collect rent for 2nd floor. Yearly rent for both floors will be about $14000. 1. Should I request an EIN tax number from IRS for the LLC? 2. Can I deposit all funds in the same checking account?

    Thank you

  • House Hunterz

    I have my first house I am about the purchase to rent out. Should I form an LLC first and then purchase through my LLC?

    What does getting and EIN number do?

    Anything else I need to do? Open a business bank account? Get a business credit card?

    • RapidRealm

      The EIN is a tax id you get from the IRS. You need that first since you have to write it on your LLC application. Opening a business checking account also requires the EIN. Might be difficult to get a business credit card since there will be no credit history on the new LLC. If you purchase the property in your own name, you can always transfer ownership to the LLC for $1 using a quitclaim deed.

      • janet bejar

        RAPID REALM can I transfer our property (with mortgage) that will be soon rented out to our LLC business to protect our personal assets by filing a quitclaim deed? Will filing a quitclaim deed affect our mortgage at all?

        • RapidRealm

          The short answer is NO. An LLC is a separate legal entity. You can consider the “transfer” as you personally “selling” the property to someone else. As is typical, you would have to pay off the mortgage to have a clear title before you can sell the property. A new mortgage would have to be obtained by the LLC.

  • Susie

    I currently own a 2 family residence, in NYC. I occupy one unit and the other is rented. I am planning on moving in to my condo in Florida on a permanent basis and want to keep my property in NY and rent out the 2nd apartment. I still have a mortgage on the property. What is the best way to proceed so as to protect my other assets and limit my tax liabilities?

  • Aziza

    I have a property that I paid in cash but has 10,000 in back taxes, can I transfer ownership, quitclaim to LLC do avoid paying someone else’s back taxes? Thank you.

    • Don

      I am not sure about your situation, but I believe my taxing authority would eventually seize the property if the back taxes aren’t paid; they do not care by whom. Was a title company involved? Did the taxing authority file a lien the title company should have found? Did a lawyer handle the sale for you? If a title company or your lawyer missed this (i.e. failed to inform you or settle the debt at closing), they might be liable. I can come up with other ideas that make sense, but, as my lawyer always says when I object, “I said that is the law, not that it makes sense.” Assuming the property is worth more than $10,000, I would consult competent counsel.

      • Aziza Spencer

        Thanks for replying. No lawyer was involved it was a cash sale between business friends. It was a quit deed. Lesson learned.

  • Cristina

    I own a house that has no mortgage on it and want to rent it out. If I open an LLC for it, Do I have to change the name thats on my house? Even if its my name which is the same that will be on as the owner of the LLC?

    • RapidRealm

      Yes, you would transfer ownership from you (Cristina) to the LLC (1234 Main St, LLC) and you would be the sole member of this newly formed LLC. All correspondence, such as leases and insurance, would come under the name of the LLC. Money coming in and out also goes to and from the LLC, not directly to or from Cristina.

  • Ellen

    I have a home that I been renting for 10 yrs. I have renters insurance and no mortgage. I was advised to set up a LLC account. Under a LLC account will I be able to deduct expenses and depreciation. Will a LLC protect my children from probate thank you Ellen

  • Shane

    Can I hold my duplex in my own name, while running the “property management” through an LLC, and have my personal assets protected, as the LLC is the entity in charge of running the business?

    • RapidRealm

      The party who is the owner of the property is the one who is potentially liable. If the property is in your own name, then your personal assets are exposed. If the property is owned by the LLC, then the assets of the LLC are exposed.

    • Rex

      Rapid Realm
      I was planning on doing the same. As I have multiple properties. I got an umbrella insurance policy on my personal name to protect myself as the properties are still on my name. I plan on putting the lease on the LLC as it is fhe managing company.

      My cpa suggested I have to issue 1099 for each property that I plan to rent out via the LLC. I am trying to verify this information.

      Also if the management company llc is setup as an S corp. how would the income of the llc be taxed? Will this bd pass through or not.

  • Karen Johnson

    I’m renting an apartment and I have a one year lease and I’ve never seen or talked to the actual owner of this property only the manager and I can’t get him to do any repairs or even spray for pest in the apt. All I have is a business name and it has LLC after its name . What r my legal rights and how can I find out the actual owners name ? Property located in Jonesboro,Arkansas . Thanks,Karen J.

    • RapidRealm

      Your rights would be spelled out in your lease so you have to let us know what it says before anyone can give you more info. In some locales, there are regulations with regards to repair items which are real safety hazards (a missing or broken stair tread versus a leaky faucet). In this case, your local building or health inspector could help but the caveat is that the inspector could declare the apartment as not habitable.

      You can find the member(s) of a LLC by checking with the Secretary of State in which the LLC is registered. The lease should have an address that you can start with to determine which state the LLC is doing business in. This LLC can be owned by another corporate entity, in which case you repeat the lookup process.

    • RapidRealm

      On a side note, it is sometimes easier to do the repair yourself than it is to chase the property owner. For example, you say you have a pest problem. If it’s just some ants, then buy some ant traps or a can of Raid for a few bucks and take care of it. If it’s squirrels or racoons in the attic, then have the landlord address it.

      • Karen Johnson

        No, it’s not ants but roaches and the manager keeps making excuses for why he hasn’t came and sprayed and that it will be taken care of next week and plus it states in our lease that I signed that if I seen bugs to let him know and he would be by to spray. He has known bout this issue and other problems in my apt. For at lease 4 months now. I’m tried of his lies so what am I supposed to do other than fixing the issues in my apt. ? Thanks, Karen J.

        • RapidRealm

          IMHO I would just take care of it myself rather than have roaches around for 4 months and waiting for someone else to take care of it (even though they’re supposed to). Seems like it would be a lot less headache than trying to contact the members/managers of the LLC and complain about the property management company.

          • Karen Johnson

            Ok, I don’t agree and I never intended to have to be made to wait for the services that my lease says I’m entitled to plus it’s not my place to do his job. Do u know how I can find out who the owner is ? Thanks,Karen J.

            • Jim Barry

              Karen, you can check with the laws in your jurisdiction. In Florida (where I have properties), Tenant/Landlord laws offer a dispute remedy to Tenants when the Landlord is unresponsive to making repairs or fulfilling other obligations of the lease. A mailed letter (certified) to the Landlord or Property Manager (politely) demanding they perform and list what needs to be done. In Florida, a Landlord who is unresponsive 7 days after the letter is received gives the Tenant the right to pay the rent into the County Clerk’s office to hold until the dispute it remedied. Check if you jurisdiction permits similar.

            • Melinda

              I guess the option option would be to move out of your apartment if it’s not being taken care of.

  • Newby

    Two questions please:
    1. If one can’t mingle the assets of the LLC with personal assets and payments from the LLC have to be property related, how is one supposed to use the net profits of the rental legally for non-property related expenses? (The LLC paying a salary to the owner comes to mind; but if the LLC income is already taxed as income of the owner, the salary option doesn’t seem right.)

    2. I bought rental property before getting married and bought one other rental since marriage in my name only (spouse and our child are in my will). We file jointly. If I now put my properties in LLC with me as sole owner (both are mortgage free), will “pass-through taxation” give my spouse ownership over the LLC if we continue to file jointly?

    • Newby

      For question 1, I found some options here:
      Year end profit distribution and monthly draws seem to make the most sense for me. So only question 2 remains now.

    • Jim Barry

      Question 2:
      Yes, the LLC and it’s assets should pass to your surviving spouse and child as dedicated in your will. Understand it will go through probate, which can take time. During probate, the executor of your will has control of your assets and will be responsible to manage the rental properties. I’d suggest consulting an estate planning attorney for your particular circumstances and possible ways to avoid probate (a trust) and make life less stressful on your survivors at a difficult time.

      • Newby

        Thank you Jim Barry. I was asking also about the LLC ownership while we’re both alive and filing jointly. Today in the event of divorce, the properties should both stay mine since they’re both only in my name and I manage them on my own. If I now hold these properties in a sole ownership LLC in my name which gets taxed to me and therefore also to my spouse because we file jointly, does that indirectly give my spouse LLC ownership and property rights post divorce? I guess this applies even without the LLC since the properties are part of our joint tax filings as is. I want my spouse to become owner only if I die while we are married and our child is a minor. Is filing separately needed for me to keep sole ownership of the LLC?

        • RapidRealm

          You don’t have to file separate to be the sole *member* of the LLC. Think of it as you *holding* 100% of the shares. But in terms of splitting up marital assets, your spouse might be entitled to 1/2 of your shares. Lots of variables go into this so you should seek additional legal counsel on this matter. Filing taxes jointly does not grant property rights. When you brought the 1st property into the marriage and wanted to exclude your spouse from claiming rights to it, then you should have had a pre-nup (or a trust), but too late for that.

  • Cathy C

    Own a home,it’s a vacation rental,has $100k line of credit attached. If I put it in an LLC how do I build credit to borrow against it if I paid off line of credit first?. Want to invest in other income producing properties. but have only small regular income from working pt and rental income

  • Harry

    My wife and I recently bought a house to rent. I was told that if I put my son’s name on the title, he can file for homestead exemption. We can’t because we have filed for our primary residence. We have another house in MS that we plan to VRBO, so we want to create an LLC to handle both rentals. Do you know if putting my son’s name on the title will affect the LLC?

  • Dawn

    My Husband and I are going to start an LLC, we own a rental home with no mortgage. However we do owe back taxes and are currently on a payment plan with the county. Would we be able to transfer that debt over to the LLC, or would we have to pay back taxes off before switching the house to the LLC?

  • Jennifer Myers

    My home was my primary residence until I married, purchased during height of home sales in 2005.I moved in with my spouse and began renting out my home in 2014.The rent doesn’t even cover the mortgage and 2nd mortg and I recently was audited for my 2014 and 15 taxes. My tax preparer claimed a loss on the property and all my expenses.I couldn’t get anyone at the IRS to explain to me why I can’t claim a loss, except that maybe my husband and I make over $150k a year filing jointly and they added capital gains.So not only did I buy a home I can’t sell since it isn’t worth what I paid for it, but I am also getting killed in taxes and get audited 2 1/2 yrs. later owing $ back,penalties and interest. Would making the home an LLC help me in MD?

    • RapidRealm

      The main reason to set up an LLC is to limit your liability. An LLC would not help with you tax situation. In the case where expenses exceed income from your rental and you make over a certain threshold, then you cannot deduct the net loss from your W-2 income unless you or your spouse are classified as a “real estate professional.” You would have to carry forward all the annual loses and then apply the sum of the loses against any gain at the time you sell the property in the future. If there is a net loss when you sell, you cannot deduct that loss from your wages. You are S-O-L and just have to chalk it up to a bad real estate investment.

  • Dorothy M

    First, let me thank you for the valuable information I have read so far. I wanted to clarify what I learned on this website to make sure I understand what I am reading. I currently own two real estate properties which are both in my name only. It was suggested that I get an LLC (single member) which I did. I currently live with my boyfriend (I am not on title).
    Am I to understand that placing both of my properties into the LLC and should the LLC gets sued, both assets including income made on rent are vulnerable? If this is true, what would be the advantage of the LLC? I have no other assets. Thank you.

    • RapidRealm

      The main reason to set up an LLC is to limit your liability. Having no assets doesn’t eliminate your liability, it just makes it harder to collect damages from you and it makes you less of a target to sue. It’s hard to imagine that if you have two real estate properties, that you don’t have any other assets; no car, no savings, no 401K?

  • Daniel

    I have a duplex and a single family investment property both with mortgages.
    Should I set up an LLC to collect the rent checks or should I keep it coming to my personal account (my own name). I hear its always better to open up LLCs and be taxed as an S-Corp when running businesses. Please advise.

    • RapidRealm

      The main reason to set up an LLC is to limit your liability. Until the 2018 TCJA, there wasn’t any tax benefit to an LLC since it was just a pass-thru entity. Now there’s a Section 199A that can potentially reduce taxes depending on the line of business.

      To do this properly, the LLC must own the properties. That means Daniel must sell the properties to “Daniel Properties, LLC” and all the liens/mortgages must be paid off in order to have clear title. You can’t transfer (assume) a mortgage nowadays. “Daniel Properties, LLC” would then have to obtain its own mortgage for the same property. This is the hard part because you are obtaining business financing, as opposed to personal financing.

  • Deborah

    Do you need workers compensation when setting up an llc. If you have no employees? I am a single member LLC with one rental property.

    • RapidRealm

      You do not need to get worker’s comp with a single member LLC that owns a rental property. Worker’s comp is intended for employees who get injured on the job. I assume you will NOT have any employees of the LLC. You, yourself, are not an employee of the LLC.

  • Mike C

    When filling taxes, can I deduct the mortgage and/or HOA fees that I pay against my rental property? For example, I rent my condo for $1150 and my mortg/HOA =$950. Can I only claim the $200 difference as earned income against the rental property?

    • RapidRealm

      What you stated is correct. Look at Form 1040 Schedule C. Part I is income, Part II is expenses. You subtract expenses from income to get the net profit.

      Where it gets complicated is if your rent was $950 and your expenses were $1150.

    • Tal

      You can deduct HOA fee and interest only not the principal.


    Should the LLC be the Owner of the Real Property and Deed changes / recording necessary?
    Thank you

  • Christopher Collins

    I currently have a property in WI that’s and FHA and I have been renting it for 6 out of the 8 years that I’ve owned it. 2 years ago I moved to TN and I’m still renting the home, but want to place it in an LLC. Is it possible for me to transfer my mortgage to the LLC our will I need to establish the LLC then apply for a loan to obtain the mortgage under the LLC?

  • JF

    If I am moving two rental properties into an LLC, how should I reconfigure my rental property insurance to protect my corporate veil. Both are currently under a rental policy insurance with $1,000,000 liability coverage under my name. But should the policy be in just the company name, or should I just add the company name to the current policies?

  • JF

    If I am moving two rental properties into an LLC, how should I reconfigure my rental property insurance to protect my corporate veil. Both are currently under a rental policy insurance with $1,000,000 liability coverage under my name. But should the policy be in just the company name, or should I just add the company name to the current policies?

  • Tim

    I just completed the llc and sent a letter to my tenant to inform them that a new lease will have to be signed and will be for the same amount of rent and the balance of the lease .i am going to up date the lease for better clarity and give the tenant the right to move or sign the new lease
    In ohio

  • Babs

    I purchased a house, which was a rental with an additional years lease on it from the tenant in 2017. My intention was to make it my primary residence after the lease was up. I opened an LLC account, but did not quit claim the house to the LLC due to the mortgage. I claimed income and expenses on my personal taxes for the rental. I need to close the LLC account, but the bank and State Finance office say I need to have tax returns filed for it first, then they’d issue a tax clearance letter. Since the house mortgage was not quit claimed to the LLC, how do I handle that with the state and the bank?

    • RapidRealm

      When you say “LLC account” do you mean a bank account or you actually created a legal LLC entity with your State? Are you trying to close your bank account or are you trying to dissolve the legal LLC entity? If you had a LLC established, then rental income and expenses would be reported on Schedule C. If it was just you as a person collecting the rent, then you would have used Schedule E. What State are you talking about?

  • Vish

    I have a stable salary and have mortgage on my home and have rented the place. The rent is less then my EMI/ HOA/ Taxes. Obviously now my income shoots up with salary + rent income. What are the best options I have for safety as well Taxes. The Tenants or myself don’t have a dwelling insurance, I only have fire insurance which is mandatory while buying the home with loan. The property is in California.

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