Do You Need To Put Your Rental Property in an LLC?
- 18 hours ago
- 7 min read
Real estate investing is one of the most popular side hustles in our online communities for doctors. Getting started with your first real estate investments requires learning some logistics, and one of the most common questions asked at our real estate events on investing in rental properties is whether or not you need to set up an LLC. There are several things to consider when making this decision, including financing options, taxes, and liabilities and asset protection. Below, we’ll cover the benefits of keeping your rental property in an LLC, potential hassles or disadvantages, and other things to research as you make this important decision.
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What is a Limited Liability Company (LLC)?
An LLC stands for limited liability company, and its purpose is to create legal separation between you, the individual, and the business you’re engaging in - in this case the rental property business. As you can imagine, there are several things that can go wrong when you own rental properties, from issues related to contracts, injuries or damages to the tenant living in your properties from maintenance or other issues, or other lawsuits.
An LLC is fundamentally an asset protection vehicle that allows you to ideally limit exposure to your personal assets in the event of a lawsuit or other issue related to your property. While there can be some tax benefits related to how the LLC is structured, this is not the primary purpose of an LLC.
It’s important to know that having an LLC does not absolve you of all personal liability. Depending on the state, owning an LLC may not be enough to shield your assets, particularly if it’s a solo member LLC. Additionally, specifically in the case of rental properties, you could still be personally liable if you are:
Negligent and maintain keep the property in an unsafe condition
The mortgage is under your name rather than the business
The finances of the business intermingle with your own finances
Do you NEED an LLC for your rental property investment?
The TL:DR is that you don’t need an LLC, but there are lots of reasons to consider having one regardless. Many people own an LLC in their names, but physicians typically have significant assets to protect, and may want to put a layer of protection in between themselves and other assets, including other rental properties in their portfolio.
The advantages of not having an LLC primarily relate to simplicity. Although LLCs are usually simple to maintain, there are logistics and some costs associated with set up and maintenance, including potential legal costs, state filings, and others. Additionally, it’s typically easier to secure financing through your own name, and some lenders put up barriers to mortgages if a property is in an LLC.
Does an LLC help you with taxes on your rental property?
This is a very common misconception amongst members of our physician communities. An LLC fundamentally in and of itself doesn’t change your taxes, unless a special taxation status is elected or in other niche situations. For most people, it is a passthrough entity, and the taxes will flow through to your personal return, meaning that you will pay the same in taxes, take the same deductions, have the same depreciation schedule, and make the same income.
So, what exactly are the advantages of having an LLC for a rental property?
Liability protection of an LLC
As we alluded to above, this is usually the most important thing, especially for physicians with a high net worth or lots of assets to protect or shield from each other (like a portfolio of rental properties). While there are some reasons alluded to above where you could still be held personally liable, there is more protection than you would have without the LLC.
Keeping multiple real estate properties or assets separate from each other
If you have multiple rental properties, being able to separate each property legally from the other means that if something goes wrong with one property, the assets or equity in the other properties will not be at risk. There are different ways to structure this so as to keep operations simple, such as having serial LLCs or an umbrella LLC.
Related PSG resource:
Anderson Advisors offers a comprehensive suite of services, including planning, registered agent, and entity formation. Our affiliate link gives you a free strategy session to discuss these issues and explore what's right for you, as well as give you access to packages at a discounted rate.
You want privacy and don’t want tenants or others to know who owns the property
Having an entity own the property and having all documents and contracts related to the property in the name of the LLC instead of your personal name makes it harder for others to know who owns the property. As a physician, you may not want tenants to know that you have a high income or for them to take out any gripes publicly, such as by leaving you bad online reviews that could harm your practice.
Allows for cleaner accounting
Rental properties have expenses and income, as does the business of owning real estate. Having an LLC allows you to open up separate accounts including bank accounts and credit card accounts, allowing you to separate business related accounting from your personal accounting. At tax time and in the case of an audit, this makes everything simpler.
Simpler for estate planning purposes and the transfer of a property
There are several legal and tax steps that may be avoided when ownership changes hands at the time of your passing or when wanting to sell or transfer a property. There are also more complicated estate planning tools that may apply which allow for gifting or other tax advantaged options.
When may having an LLC not be worth it?
Only having a single rental property
Some people may argue that it’s not worth it to have an LLC when there’s only one property, and that simply having insurance is adequate protection. Most investors will carry insurance products such as landlord insurance and umbrella insurance, and this may cover most potential liabilities.
In this case, what many real estate investors will do is to buy the property in their personal names, get insurance, and then add LLCs later as their portfolio grows.
The best financing or mortgage option does not allow having the rental property in an LLC
Many times, lenders will not allow you to buy a property in an LLC, and if you already own a property, trying to transfer the property into an LLC may cause issues as it may treat the transaction as a sale. Ideally, talk to your lender ahead of time about your options before you purchase the property so that you avoid surprise issues later.
Related PSG resource:
How do you put a rental property into an LLC?
We’ll write a separate article about putting a property into an LLC, but it’s important to know that the process will be different based on whether you buy the property directly from the LLC from the beginning versus buying the property in your personal name and then transferring the property into an LLC later. Many lenders won’t allow you to use an LLC to buy a residential property, so you may need to give a personal guarantee or buy using a different type of financing product such as a commercial loan or a DSCR investor loan.
Regardless of how you do it, you’ll want it to be clean. The LLC will need to be formed appropriately, with the LLC on the purchaser contract, title, insurance, financing, and bank accounts. You’ll need all the documentation for contracts, insurance policies, accounts, deed transfers if applicable, and financing to all list and properly document the LLC. If there are tax implications to a transfer, these must be addressed and all fees must be paid.
If you don’t do this, it can void insurance policies or legal LLC protections, or cause title issues, if you don’t do it properly. Similar issues can apply if you mix personal and business finances.
Make sure you work with appropriate professionals to set up your LLC to avoid hassles or issues later. There can be state specific laws to consider, so it’s important that whoever you choose to work with understands the asset protection and legal and tax considerations specific to your state.
Related PSG resources:
Anderson Advisors offers a comprehensive suite of services, including planning, registered agent, and entity formation. Our affiliate link gives you a free strategy session to discuss these issues and explore what's right for you, as well as give you access to packages at a discounted rate.
Conclusion
While having an LLC can cause logistical headaches to set up and secure financing, the asset protection benefits are compelling for high income professionals. Insurance can sometimes address this issue, but particularly if you’re planning on pursuing real estate seriously and having multiple properties, you’ll likely want to explore the benefits of putting your rental property into an LLC.
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Related PSG resources:
For those interested in implementing asset protection tools, Anderson Advisors offers a comprehensive suite of services, including planning, registered agent, and entity formation. Our affiliate link gives you a free strategy session to discuss these issues and explore what's right for you, as well as give you access to packages at a discounted rate.