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Do I Need an LLC for My Rental Property?

LLCs and real estate seem to go hand in hand these days. Anyone to whom you speak that dabbles in real estate investing understands the need for liability protection, but may not understand the proper way to protect themselves. Their insurance broker may have told them that an umbrella policy will do the trick, but I am of a different opinion. Using an entity to hold real estate is a fantastic way to protect yourself from liability, provide some tax benefits and give you peace of mind that your personal assets are protected.

Many clients come to me before they buy a rental property to understand all of the ins and outs of real estate investing and how to protect themselves. Now, there are many different ways to structure a real estate investing empire, but I want to focus on using the LLC to hold property. An LLC, or Limited Liability Company, is a great entity in which to hold property. The ease of formation and limited formalities that need to be adhered to make the LLC a good fit for a real estate investor that wants to focus on finding deals, not handling paperwork. There is no board meetings, annual filings and burdensome minutes that are drafted every month.

Another benefit of an LLC is the tax treatment. As a single member LLC, there are no additional federal tax filings that need to be made unless a corporate tax election is made (outside the scope of this post), so the LLC is essentially taxed as a sole proprietorship on your individual return. If there are 2 or more owners, the LLC is taxed as a partnership (again unless a corporate election is made) and the income and losses pass through to the owners individual tax returns. No double taxation.

Lastly, because of the ease of set up and managing, LLCs can be used to help spread liability risks between entities. Most of my clients put no more than 2-3 properties into 1 LLC, thereby keeping the risk spread between entities. For example, if a client has 6 properties that are owned in 3 separate LLCs and someone gets hurt in property 1, owned by LLC 1, that person will only be able to get at the properties owned by LLC 1, barring special circumstances. If all 6 were owned by the same LLC, all of the equity in those properties would be at risk.

As you can see, LLCs are great vehicles in which to hold real estate from a liability and tax perspective. We have only scratched the surface with this discussion. If you would like to find out more about forming LLCs to hold real estate and the do’s and don’ts, contact our office today at www.cozzalaw.com

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