Should You Form an LLC for Rental Property?

Form an LLC for rental property

I had a question from a client about forming an LLC for rental property.

Question: We are considering forming and LLC for rental property we have and are considering purchasing. Our intent of creating the LLC is to isolate and manage the finances with regard to the rental. We plan on purchasing other properties for the same purpose. Is there any value in creating the LLC for this purpose?

Answer: Normally, people will form an LLC for rental property for several reasons. The biggest is liability protection and an attorney should be consulted about whether an LLC is prudent or whether good insurance, including an umbrella policy, is sufficient. The other reasons are because they want an LLC as a business name for legitimacy, to attract investors, or to lessen IRS audit risk (partnerships and corporations get audited less than individual returns). But having an LLC with two owners in a non-community state would also require filing a partnership return, which is extra expense.

Other than that, just having a separate bank account for each rental can sufficiently keep finances organized. Please be aware that you will need to track the income and expenses separately for each property. You may want a separate bank account for each property or make sure to set up your tracking properly to track everything separately. I would not form an LLC just for that reason. There are no other tax benefits from having the LLC other than the non-tax benefits outlined above.

Please be aware, that if you are going to have an LLC for rental property, the real estate must be titled in the name of the LLC for you to file taxes under that LLC and for the legal liability protection you may be seeking. If you have an LLC and the real estate is titled to you individually, there really is no point in the LLC.

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