Starting a limited liability company (LLC) for real estate rentals can be a good step when it comes to enjoying tax advantages and boosting your current real estate holdings’ worth. As with most investing strategies, there are many benefits to this option.
However, as LLC’s are regulated at the state level, starting one involves a process that differs from state to state. But the benefits below apply to all:
Controlled Personal Liability
If you are sued over a property you possess as an individual, all your personal assets will be on the line. But if you form an LLC, only LLC-owned assets will be at stake. In other words, your personal finances will be safe and only your rental property will be jeopardized.
Rental Property Independence
Just as you draw a line your business assets from your personal assets, so should your rental properties be independent of one another. If you have lots of properties, you can protect them by forming an LLC for each one. Whatever happens to any of them, the rest will not be affected.
Pass-Through Taxation
Businesses possessed by individuals enjoy what is known as pass-through taxation. Corporations are usually taxed directly on their profits, and owners are taxed again on the income they make from their businesses. If you’ve set up an LLC, the money made by your company just “passes through” to you, the owner. So any income generated by your LLC (your rental property) will fall under your individual income tax return, hence reducing the total amount removed from your income for taxes.
Easy Separation of Your Business and Personal Expenses
When you set up an LLC, you should open a new bank account dedicated to it. This way, it will be more convenient marking your personal expenses from your business costs. This will also simplify the tax of claiming businesses expenses during tax time. When checking your bank statements, you will automatically see which expenses were spent for business or personal needs.
When to Form an LLC
A common question is whether the LLC must be set up before purchasing a rental property or after. It will actually work both ways, but there are benefits to doing it prior to the property purchase, such as not having to pay Title Transfer Tax, not having to update rental leases once the transfer is completed, and more.
If you start an LLC first, you can purchase the property in the LLC’s ownership, in which case your LLC’s name will be on the property deed. If you already own the property, the deed must be transferred to the LLC.