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Is it a good idea to form a limited liability company (LLC) for your rental properties? If you are serious about investing or growing your rental business, I highly recommend forming an LLC. This is a popular strategy among property owners allowing you to buy, sell, and rent out real estate as a separate legal entity.
According to the Rental Housing Finance Survey conducted in 2021, not all LLCs are big companies. Some are owned by individual investors who chose this business structure for its legal and financial advantages. Here are the three main benefits of owning a rental in an LLC:
1. Liability and asset protection. Forming an LLC separates your personal and business assets, reducing your personal liability and protecting you from business debts and lawsuits. For example, if one of your tenants had an accident on your property and wanted to sue for damages, they would have to sue your LLC. However, even with an LLC, you might still be responsible on special occasions. For example, you took out a mortgage and personally guaranteed it. The lender can come after you if your business goes into default.
2. Reduce your taxes. LLCs are typically taxed as pass-through entities. Your rental income is not taxed at the business level but flows through your individual tax return. You may also deduct rental expenses from your income. In addition, if you manage a rental property through your LLC, you can claim a 20% business income tax deduction on your personal income taxes.
3. Easy formation, management, and profit sharing. Forming an LLC is simple, with minimal paperwork and filing requirements. There are also fewer administrative duties like annual meetings or filing detailed financial reports than in a corporation. Finally, you have the option to form a single or multi-member LLC. In a multi-member LLC, the members can choose how to share the profits. However, you must follow IRS regulations on the special allocation of earnings requiring profit sharing to reflect ownership percentages to avoid tax problems.
Forming an LLC for your rental property has a lot of legal and financial advantages. Despite all of the benefits you can get from an LLC, you should still consult with your registered agent to determine if an LLC is the right choice for you. If you have any questions or need some guidance, give us a call or send us an email, and we’ll help you out.
