Real estate investors are faced with many important decisions on how they will own and operate their rental properties including the legal ownership structure of the property. Should you legally hold the property in your personal name, or should set up some type of ownership entity such as a corporation or LLC? In this post, we will provide a few helpful considerations to choose the best form of ownership for your rental portfolio.
First and foremost, you should understand the tax implications. Generally, you are not taxed differently if you decide to hold the real estate individually or in an LLC. If you own residential rental property, you will likely be taxed at your individual tax rate.
If there are no tax advantages, then why go through the trouble to set up an LLC for your investment property? The main reason we urge our investor partners to hold their rental property in an LLC is legal protection. An LLC provides protection to you and to the property, separately. Vendors, tenants and neighbors can all pose a potential legal liability. By holding your property in an LLC, you are setting up a legal barrior between you and your property. To learn more about insuring your rental properties, watch our video here. For example, if your tenant slips and falls inside your property, they may decide to sue you. Here’s where the LLC becomes your safeguard. If you have the legal entity strutured property, they may only "sue" the legal entity - which is the LLC that legally owns the property (not you personally). This offers a layer of protection from your other assets.
LLCs can also protect your property from you! Let’s say for instance, you get in a car accident and seriously injure the other person. They can sue you personally but will not be able to pursue any of the property you hold in an LLC. It’s really a double benefit to holding your property in an ownership entity.
There are a few different types of ownership entities for investors to choose from. We’ve listed some of them below, but of course we strongly recommend speaking with a legal professional before making any decisions if you have questions.
- LLC – Limited Liability Company
This is the most common and is generally our recommendation to investors looking to set up an outside entity for their assets.
- LLP – Limited Liability Partnership
- LLLP – Limited Liability Limited Partnership is also recognized in the state of Colorado
The costs to set up an LLC are very minimal. You register with the state for $10 and are responsible for filing a separate tax return come tax season. Don’t let these be a deterrent. If it’s not already clear, setting up an LLC can be worth its weight in gold if you ever find yourself in a lawsuit!
Our final recommendations include taking into consideration the length of ownership and the value of the property and portfolio. For short-term investments, an LLC may not be worth the effort. However, for long-term buy and hold investors we do urge setting up an LLC to hold your rental assets simply because of the protection benefits. When deciding how to allocate your assets among LLCs, we recommend maxing out a single LLC up to $5 million, the typical cap for insurance coverage. It is not necessary to set up an LLC for each of your investment assets, and in fact becomes time-consuming and expensive.
Talk to your tax professional and your legal professional before setting these up as you must do it properly to obtain the full benefit.
As always, the Grace Property Management team is here to serve as a resource. If you have additional questions about how best to own rental property, or any other questions about operating an income property, give us a call. 303-255-1990