THE ADVANTAGES AND DISADVANTAGES TO OWNING RENTAL PROPERTY IN AN LLC
So why do so many rental property owners choose to use LLCs? There are a few key benefits to consider.
1. LIABILITY REDUCTION AND ASSET PROTECTION
2. PASS-THROUGH TAXATION
Holding rental property in an LLC also provides some options and flexibility when it comes time to pay taxes. The IRS allows LLCs to elect how they would like to be taxed- as a sole proprietorships, partnerships, s-corporations, or c-corporations.
Most rental property owners choose to have their LLCs taxed as sole proprietorships (for one owner) or partnerships (for multiple owners). Both allow for ‘pass-through taxation’. Pass-through taxation means that income is not taxed at the business level, but instead flows through to your individual tax return. Losses also flow through and can frequently be used to offset income from other sources.
Holding properties in an LLC with pass-through taxation results in the same tax bill as owning properties in your own name. This is often the most tax efficient structure for real estate investing. The tax flexibility of LLCs allow for their other benefits while avoiding the burden of extra layers of business taxes that come with some corporations and optimizing for an efficient tax structure.
3. SIMPLICITY AND FLEXIBILITY
1. ORGANIZATIONAL COST
CONCLUSION (AND A NOTE ON RECORDKEEPING)
Owning rental property in an LLC offers several important advantages. Unfortunately, for some investors, obtaining financing or other realities may make holding properties in them prohibitive.
If you do choose to use an LLC, please remember that LLCs can only protect your assets, operate tax efficiently, and remain simple if they are properly set up and maintained. In order to maintain an LLC, you need to comply with the registration requirements of the appropriate state and file a tax return (unless it is a sole proprietorship). You must also keep the LLC independent of your other financial activities by making sure that there is no intermingling of personal or other business funds. In practice, this means you need a separate bank account per LLC (read why here) and good bookkeeping practices.
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Last updated: August, 2020