Should i set up an llc for rental property

Putting down 5 percent or less through an LLC is a rare feat. Assuming that you live in the property for at least two years—and assuming that the property appreciates over that timeframe—you can sell your investment for a tax-free capital gain. Unlike a exchange, the money is truly tax-free and can be spent on your next vacation, manicure, or other non-real estate assets.

Of course, a good real estate investor runs their property as professionally as they can, with separate email addresses, bank accounts, and credit cards for property-related expenses.

But because this is your house, at the end of the day, you have the option to cheat when necessary by mixing personal and business assets. I have no corporate veil to defend, and thus have more flexibility in moving assets around, managing tenants, doing work on the property, etc. But not all investors house hack—and even if you are opting for this method, you may prefer the veil of an LLC. There are a number of good reasons to elect for an LLC.

LLCs protect you from liability claims. Whoever makes the claim will come after the LLC, not you personally. Full transparency: There are ways around this. The most important one to mention is liability insurance. It makes sense to want to distance yourself from your properties for liability reasons. But for many first-time investors who are owner-occupiers or owner-managers, this advantage is likely forfeited from day one.

Your tenants will see if you put the work in or not: getting that leak fixed, mowing the lawn, installing that new carbon monoxide detector, etc. Your presence on-site may expose you to legal risk regardless of your LLC status.

You can try to write them off on your personal tax return, but it looks a little suspect to the IRS that a person, not a company, is claiming business expenses. It makes things cleaner from a financing and tax perspective to write them off under an LLC. Rather than continue at a loss, you choose to forgo development of the rental property and abandon the project.

If your property is owned by an LLC, unpaid contractors can sue the LLC for compensation, but your personal assets are protected. Setting up an LLC for real estate investment has benefits if you would like to purchase the rental with a business partner.

Real estate LLCs make it possible for foreign ownership and investment options that are not available to corporations. In addition, there are yearly administrative and regulatory fees required to maintain your LLC records. The more the owner can demonstrate the LLC does act as an entity separate from the owner, the more reliable the limitation on liability is.

And that adds administrative costs. Investors into corporations only pay taxes on the distributions. Nationally-recognized real estate writer Christy Murdock Edgar creates content for some of the biggest names in real estate and REI and consults and coaches on content marketing strategies for clients all over the US. She is a current faculty member with Florida Realtors and leads workshops and training events for brokerages both online and onsite nationwide. Free Property Valuation.

Browse our rental property marketplace. Last updated on October 29, This article, and the Roofstock Blog in general, is intended for informational and educational purposes only, and is not investment, tax, financial planning, legal, or real estate advice. Roofstock is not your advisor or agent. Please consult your own experts for advice in these areas. Although Roofstock provides information it believes to be accurate, Roofstock makes no representations or warranties about the accuracy or completeness of the information contained on this blog.

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Some of these partners may compensate Roofstock for customer referrals. Property purchased by an LLC, or a mortgage transferred into an LLC, typically has higher interest rates than those purchased by an individual.

It is worth exploring this possibility, and how to avoid it, prior to the transfer. Again, you may need to consult an expert to better understand your options and the risks associated. Forming an LLC may cause you to incur additional taxes, depending on where you live. You may also end up paying a title transfer tax, which is charged—as the name suggests—for transferring the property title from one name yours to another the business.

Title transfer tax is charged by a state or local government and is usually based on the value of the property and its classification.

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