If you’re a real estate investor – or you’re thinking of buying your first rental property – the question of whether or not to form an LLC (Limited Liability Company) has probably crossed your mind. LLCs are among the most common types of legal entities under which property investors own and run rental properties as a form of business. The short answer to our main question is: yes. You should probably set up an LLC for rental property.
Being in the real estate business always brings complexities and risks. Although there isn’t one answer that applies to all property investors, there are some reasons why forming an LLC for rental property investments is almost always a smart move.
Advantages of LLC for Rental Property Owners
Limit Personal Liability / Asset Protection
The main reason why a real estate investor should consider an LLC for rental property is in the name itself “Limited Liability.” This means that your LLC serves as a separate entity that limits your personal liability (as the landlord or business owner) to potential lawsuits related to the property. For example, say your tenant gets injured from falling down the stairs and files a lawsuit against you. If you individually own the investment property, then your personal assets are at stake.
On the other hand, if you had set up an LLC for rental property, you would not be personally liable and only the assets owned by the LLC (as opposed to all your personal assets) are at stake. In other words, instead of you, as the landlord or real estate investor, being personally reliable in the event of a lawsuit, your LLC will serve as a legal business entity to shield and protect your personal assets. This is one of the most important ways of how an LLC for rental property investments can help your real estate business.
Related: The Millennials’ Guide to Starting a Real Estate Business
Tax Advantages
Whether you’re renting out an investment property on the side of your 9-5 job or you’re a full-time real estate investor, forming an LLC for rental property will offer you some significant tax advantages.
LLCs have “Pass-Through Taxation” which basically means that any income made will pass to the owner (or owners) and taxes are then paid as an individual – the LLC itself doesn’t pay any taxes! This tax treatment will help property investors avoid double taxation (where a corporation is taxed directly on its profits and owners are then taxed again when they make an income). Thus, forming an LLC for rental property investments will minimize the amount of money taken out of your income for taxes.
Being in the real estate business with an LLC also gives property investors the ability to deduct operating expenses for tax purposes as part of maintaining and managing investment properties. Moreover, based on current IRS rules, the owner of an LLC can deduct mortgage interest the same way a sole property owner can.
We should mention that the recent changes in the tax law have made some adjustments to how pass-through entities are taxed. So, as a real estate investor, you should discuss whether these changes are to your advantage with your CPA or a professional tax advisor.
Related: How the 2018 Tax Reform Affects Real Estate Investors
Manage You Money More Efficiently
So we’ve seen how an LLC will protect a real estate investor from worst-case scenarios and, at the same time, will minimize his/her tax liability. Another important benefit of setting up an LLC for rental property is how it’ll make your real estate business life easier.
If you do create an LLC, you should create a business bank account for your investment property (as well as a business credit card if you want). As a result, you separate your personal expenses from your business expenses. This will help you run your business better and manage your money more efficiently.
Doing so also has a great tax advantage: it becomes much easier to keep track of your business expenses and claim them when the time comes to do your taxes! When you check your bank statement, it’ll be visually clear which expenses are business and which are personal. So, with an LLC for rental property, a real estate investor can make sure to track and deduct any purchases made with business expenses at tax time.
Related: What Rental Property Tax Deductions Apply to You?
Separates Investment Properties from Each Other
In addition to separating the rental property from your personal assets and business expenses from the personal expense, it’s smart that a real estate investor separates his/her investment properties from each other as well. If you own and manage multiple investment properties, you can set up separate LLCs for each property to better protect each one from liability claims. To put it simply, if someone files a lawsuit against one of your investment properties, this will not affect your other properties if they’re under separate LLCs.
If you’re looking for your next investment property to grow your business, we can assist you! Mashvisor helps property investors in the U.S find the best investment properties that promise a good return on investment. If you have a free Mashvisor account, click here to use our Property Finder and find properties in a matter of minutes!
To learn more about our product, click here.
When Should You Create an LLC for Rental Property?
If you decide to set up an LLC for your real estate investment, you might be wondering when you should create it – before or after buying an investment property. Even though property investors can transfer ownership of investment properties to the LLC, it’s best to create an LLC before making the purchase.
If you create an LLC for rental property after buying the property, you’ll have to notify your mortgage holder that you’re transferring title to the LLC. In addition, what if your mortgage holder decided to close the loan – creating closing costs for you – or issue a new loan with an increased interest rate? Not to mention, as a landlord, you’ll have to update your rental leases and inform tenants that an LLC now owns the rental property.
In short, creating an LLC for rental property before buying it will help you avoid a number of headaches.
Final Thoughts on LLC for Rental Property Investments
Over the last decade, LLCs have become one of the most preferred entities through which to protect real estate investment properties. Setting up an LLC for rental property investments is always a smart move to succeed in the real estate business. If you’re looking to buy your first investment property before forming an LLC, use our Property Calculator to search for and analyze different investment properties in your city and neighborhood of choice. Sign up to start your search!
Note: We are not asset protection, legal, financial, or tax experts. We only tell you what we’ve learned through research on whether an LLC is best for owning and running investment properties as a form of business. Please consult a professional before making any decisions in this arena!
Do you have questions about Mashvisor? Click here to read our FAQs and learn about our tools.