Key Points:
- Considerations for best form of ownership
- What does an ownership entity do?
- What are my options for an ownership entity?
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 you set up some type of ownership like a corporation or LLC?
The first thing to consider in regards to LLCs is taxes. 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 either way. If there are no tax advantages, the question becomes, "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 for legal protection. Vendors, tenants, and neighbors can all pose a potential legal liability. By holding your property in an LLC, you are setting up a legal barrier between you personally and your property. To learn more about insuring your rental properties, watch our video here. For example, if your tenant slips and falls on your property, they may decide to sue you. An LLC acts as a safeguard. If you have the legal entity structured properly, the tenant may only "sue" the legal entity of your 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 action against any of the property you hold in an LLC.
There are a few different types of ownership entities for investors to choose from. We’ve listed some of them below, but 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 cost to set up an LLC is 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.
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. When deciding how to allocate your assets among LLCs, we recommend maxing out a single LLC for 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, which would become time-consuming and expensive.
Talk to your tax professional and your legal professional before setting up an LLC or the like 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
