Though owning rental properties sounds easy in theory, it can be difficult in practice. There are conflicting accounts about how the property should be managed, and whether the property (or properties) should be placed within an LLC.
Here, we go some way toward answering that question.
Setting up an LLC comes with advantages and disadvantages. In other words, there is no singular answer. Often, an LLC is the best option for one investor, but should be avoided in other cases. But what are these circumstances and how can they affect you?
Placing my Rental in an LLC?
Let’s review some of the principal advantages of placing your rental properties – whether one or many – within an LLC. There are legal benefits, tax advantages and advantages when transferring property.
- Legal benefits – if the investment is linked to a personal creditor, then that creditor cannot stake a claim to the property when under the rubric of an LLC. In other words, the LLC shields investors from creditors. Similarly, an LLC protects against liabilities from tenants and guests, too. The LLC offers a legal barrier that can, at times, prove invaluable.
- Tax advantages – if the LLC has two or more investors, it’s referred to as a “pass-through” company. For companies of this kind, it’s only subject to capital gains rates. However, it is not subject to corporate tax rates – meaning there is no double taxation. If the LLC has only one investor, it’s categorised differently – this time, as a sole proprietorship. This means that no additional tax return is required.
- Transferring property – when your property is part of an LLC, it means that it becomes considerably easier to transfer ownership of the property. It remains much more cumbersome to transfer ownership when the property is outside the LLC and personally owned. Think about inheritance implications, too. Property within an LLC is easily transferred to children, whereas it’s much more complex and legally-contentious to do so outside the bounds of an LLC.
So, should you incorporate your properties – whether one or many – into an LLC? As you can see, it depends on your individual circumstances. Generally, though, we can also conclude that there are more associated risks when property is personally owned. The LLC can shield your property from creditors and damage liability, while also easing you through the process of transferring ownership when required. And as we learned, there are also tax benefits, too.