What Are The Tax Benefits Of An LLC For A Rental Property?

If you have a rental property business, you are most likely aware of the complications that can arise through no fault of your own. For instance, someone getting injured on one of your properties can be costly as you’ll be personally liable for the damages, among other things.

Fortunately, you can avoid this by using a limited liability company (LLC) for your business.

This not only protects your liability but also grants many tax benefits of LLC for rental property.

Let’s go over everything you need to know about this business entity in relation to your rental property business.

How To Start Operating Your Rental Property As An LLC 

Before explaining the LLC for rental property tax benefits, it’s important to know how to start using this corporate structure. 

In simple terms, if you leverage this particular organizational model, you’ll be operating as a landlord instead of an individual. This offers you a plethora of tax benefits along with a more professional business image. 

Furthermore, since an LLC gives you flexibility in ownership, you can handle your taxes in a variety of ways (depending on the ownership structure).

In case you currently have no rental properties, you’ll have an easier time acquiring them after forming an LLC because the company will own the property from the start. This saves time in transferring the ownership of the property from yourself to the company. 

Once you register an LLC with the help of an attorney, you can set up your rental company by following these steps:

1. Obtaining an Employer Identification Number (EIN)
2. Opening an account in your LLC’s name
3. If you already own rental properties, you need to file a quitclaim deed to transfer the property to your company. It’s also recommended to ask your bank to transfer the mortgage to the LLC.

Do note that you can set up an LLC for each property. Doing so requires less effort in keeping track of finances and sidesteps the mistake of commingling the funds. The only drawback is that you will have additional costs associated with setting up multiple LLCs.

LLC For Rental Properties Tax Benefits

One of the key tax benefits of LLC for rental property owners is pass-through taxation. It’s quite straightforward - you’ll be responsible for paying all the taxes and steer clear of double taxation that you’d have to handle if you chose to form a corporation.

So in a nutshell, you’ll have all the liability protection benefits while also being taxed as if you were a sole proprietor.

Even if your LLC has multiple members, you’ll have many options at your disposal regarding taxation. Taxes have to be passed through to the members who are required to fill out Form 1065 with their tax returns. All members will claim a share of the profits, but they aren’t permitted to claim the entire income of the LLC. 

What's more, owning a property through a limited liability company allows you to take additional deductions on your taxes, as well as deductions for maintenance and utilities if you run the LLC out of a home office.

Another one of the tax benefits of an LLC for rental property is the option of electing to tax your company as an S or C corporation to be eligible for a different tax structure. We recommend talking to an experienced tax attorney to find the best structure for your company in order to minimize your tax liability. 

Additional Benefits Of An LLC For A Rental Property Business

Apart from the tax benefits of LLC for rental property, you can take advantage of extra protection this business structure offers, such as:

1.Asset protection

When you own properties in your name, you have no asset protection if someone gets injured on your property and sues you for damages. On the other hand, if your rental properties are owned through an LLC, you may have to pay for legal costs but your personal assets will be protected.

Since the person suing you can only go after assets of the LLC, you can protect your investment even further by having separate LLCs for each property. This limits the assets that are vulnerable in case of a lawsuit.

The same protection applies to situations in which you have a personal debt and are dealing with creditors - the assets in your LLC will be protected.

2.Estate planning benefits

With an LLC, you can set up a trust that owns your interest in the company. This way, you can pass the ownership of the LLC after you die to your heirs, as well as avoid a costly probate process and shorten the process of transferring ownership of your assets to your heirs.

3.Simplified financial management

Since your personal income will be separate from your LLC income, financial management will be fairly simpler, especially if you have an LLC for each property. This is because each company will have completely separate funds and bank accounts, so you won’t need to mark each receipt or assign values manually to different sources of income.

Circling back to tax benefits of LLC for rental property, you’ll also have an easier time managing your taxes since everything will already be separated and you’ll know which deductions apply to which property.

4.Professionalism

When owning multiple rental properties, having an LLC means taking the shorter route to success as you can market different properties under the same brand name. Thus, you can attract more tenants with a catchy name that is easier to remember than acting in your name. 

An LLC can also be a huge plus if you’re aiming to attract investors or are looking to borrow funds to acquire more properties.

Start An LLC With The Help Of Law Offices Of Mary E. King

To maximize the tax benefits of LLC for rental property, you need expert advice, particularly when it comes to the process of finding the best tax structure for your circumstances. 

Get in touch with the Law Offices of Mary E. King and receive assistance with your LLC from the most reliable tax attorney in the Sunshine State. 

Call 941-906-7585 or fill out our online contact form to schedule an appointment and set up an LLC the right way.

Note: 

The information in this blog post is for reference only and not legal advice. As such, you should not make legal decisions based on the information in this blog post. Moreover, there is no lawyer-client relationship resulting from this blog post, nor should any such relationship be implied. If you need legal counsel, please consult a lawyer licensed to practice in your jurisdiction.