Depending on how many rental properties you own, you may treat your real estate investing as either a personal “side gig” or as a full-fledged business. But in any case, the way in which you own your rentals could protect you financially, or on the other hand, put you at substantial risk if certain incidents should occur. One way that many real estate investors own their properties is in an LLC, or Limited Liability Company.
An LLC is a type of business structure that in some ways is similar to a corporation and in others like a sole proprietorship. For instance, these entities are typically treated as a “pass-through” organization for federal tax purposes, meaning that the company itself does not pay tax on the income received by the business.
One of the biggest benefits of owning investment real estate in a Limited Liability Company is the protection that the property owner can garner from personal responsibility for debts and liabilities.
In this case, if a tenant decides to sue you, the property owner, for an issue regarding a particular property, they cannot get to your personal assets – or even to any other properties, if they are owned in separate LLCs.
If you currently own investment property in your own name, but would like to transfer the ownership to a Limited Liability Company, it is possible to do so. If this is the case, though, it will be necessary to notify your lender (if the property has a mortgage). You may also have to update the lease and let the tenant(s) know that the home or unit is now owned by the LLC.
Owning and managing rental property can involve a number of “moving parts.” So, if you would like to delegate some (or all) of these responsibilities, working with an experienced property management team that is also well-versed in tax issues can be beneficial.