You may have a few questions and concerns regarding an LLC for property rental like what exactly is an LLC, how can you set one up and what are some of the benefits of setting up an LLC for your property rental? We will do a deep dive into all of the questions so that you can have all the required knowledge on the different aspects of an LLC for your property rentals.
The Definition Of An LLC
By definition an LLC is a limited liability company and is a business structure. Setting up an LLC can be a simple process if you know all the required steps and an LLC can be set up with a business partner, a group or simply by yourself. When you have an LLC all set up for your property rental each partner or group will be an active member of the LLC.
To set up an LLC you will have to do a search for the requirements depending on where you are located in the world, since all of them are regulated on a state-by-state level and the process for setting one up will all depend on which state your property/properties are located. Going into all the different processes for each state is out of the scope of this article, but a simple Google search for LLC setup processes + the state you are located in will answer all your questions with regards to setting up an LLC in different states. If you are located outside of the United States then this same search will apply. By doing this Google search you will also be able to get all the fees for the LLC setup process as well as in-depth resources on this topic. However if you have any questions or concerns on the setup process, feel free to get in contact with us and we will be more than happy to assist you with your queries.
The Benefits Of Creating An LLC For Your Property Rental
Separation of Your Rental Property Units
If you have a rental property or multiple rental properties then you will want to keep your rental properties separate from your personal assets and you will also want to keep your properties separate from each other.
Keeping all your properties separate from each other will be very beneficial to you and the way you separate all your rental units from each other is by setting up an independent LLC for each property unit that you own. This works in your favor if anything comes up that could put all of your properties at risk. For example if someone had to take you to court and sue you for anything related to one of your properties, since all your rental units have separate LLCs attached to them, the lawsuit will only affect the one rental property unit in question and all of your other property units will be safe and you will not be at risk of losing any rental income on your other properties due to the lawsuit.
Many Tax Advantages
When you set up your rental property as an LLC, you get tax advantages by doing so, and this is one of the main reasons why you would want to set up your rental property/properties as an LLC. When it comes to rental properties there is something called pass through taxation and this is one of the main benefits of a business owned by an individual. Typically when a business or organization makes profits they are taxed on those profits and then the owner of the company or organization is taxed again when they turn an income from their business.
This does not happen when you have an LLC for property rental as the income and profit generated from the rental units will be able to pass through to the person who owns the rental property/properties aka the business or organization. So whenever income is generated by your rental units this will go directly to your tax return (you as the owner of the units) therefore reducing quite significantly the amount you as the individual will have to pay in tax for your rental units. A win – win situation. This is why we highly recommend that you set up all your rental units and an LLC to take full advantage of this.
Business and Personal Expenses Become Separate
It is always the best decision to keep all your personal and business expenses separate. This just makes things so much easier when it comes to paying bills and when it comes to tax season you have everything organized and ready to go. In the LLC set up process you will create an entirely separate bank account for the LLC of your property unit, that way all your expenses from your LLC property unit/units become separate from your personal expenses which is great.
So in the instance when you need to make a claim for a business expense it is very clear where the expenses are coming from since everything is separated into different bank statements, making the process of claiming expenses in your business that much easier.
You may be asking how to keep track of all the expenses for your LLC property unit and the quick answer is that you can hire an accountant. Hiring an accountant is the most expensive way of doing it but will also save you the most time and frustration when it comes to paying taxes or claiming expenses within your rental property business.
Another great and affordable solution is to use accounting software that you can use on your computer, phone or tablet. One that comes highly recommended in the online business world is Quickbooks and has overall the best ratings in the industry and some of the best customer service and tutorials so you can learn exactly how to use the software in step-by-step form with text and video walkthroughs.
The Perfect Time To Create An LLC
You may be asking yourself at what point do I create an LLC for my property rental? Is it better to create an LLC before I buy my rental property/properties or after I buy it? The quick answer is that you will be able to take full advantage of all these LLC perks no matter when you create your LLC, however with that being said, we always recommend that you create an LLC for your property unit before you make your purchase of the property. This is because if you form your LLC after you make your purchase then there will be much more additional steps that you will need to complete in order to get your LLC all set up. Let’s dive into some of the additional steps you would need to take if you created your LLC after buying your property unit.
This step will create a lot of extra work for you to do because you will have to notify all your tenants that your property is now operating under an LLC and you will need to draft and create all new lease agreements that your tenants will then need to sign. This is a lot of work, especially if you own multiple properties and then create an LLC for each one of them.
Some tenants may also not like the idea that your property is now operating under an LLC and may not sign the new lease which will lead to you losing tenants due to this, which will cause you to lose some rental income while your property unit remains vacant in the time that it takes to find new tenants. If this situation occurs with multiple of your properties then you are looking at quite a substantial loss in rental income.
Negative Tax Implications
Transferring your current rental property into an LLC may cause new tax laws regarding your property to take effect, which will force you to pay more in taxes for the same rental unit which is bad for maximising the most amount of income from your property/properties.
You will just have to look up all the tax laws that surround this topic but we will give you one example in this article so that you can have an idea of what kind of tax laws may take effect if you turn your property into an LLC after you have bought it.
One tax law that will go into effect in this situation is the Title Transfer Tax and it is defined as a transfer tax that is essentially a transaction fee imposed on the transfer of title to property from one entity to another. This kind of tax is typically imposed where there is a legal requirement for registration of the transfer, such as transfers of real estate, shares, or bond.
Mortgage Holder Will Need To Be Notified
You will be required to let your mortgage holder know that you are transferring the title of your rental property to an LLC and depending on the type of mortgage holder that you have it could take some time to implement. It is never good to have delays when it comes to managing your properties so to avoid having to do this it would be best to set up your property as an LLC before you make your purchase of the unit
In some situations, now this also all depends on your mortgage holder and everyone’s experience will be different but your mortgage holder may choose to close the loan agreement that you have with them. Which will add some additional costs to you as the person who owns the property unit.
The Cost Of Setting Up An LLC
In 2020, the average cost to set up an LLC is $132 and this is a one time filing fee which will create your LLC for property rental by state law.
Below is a map of all 50 states in the United States so that you can have a good idea of all the different LLC for property rental filing fees per state
As you can see by the picture above above, the cost to set up an LLC can vary quite a bit depending on where you are located, so refer to this picture when finalizing your finances for setting up your LLC for your property rental.
Also take into consideration that the LLC fees shown here do not include any additional fees fees like annual fees and things of that nature.
You should not try and file your LLC in a different state in order to save money, because doing it that way will end up costing you a lot more in the long run and it won’t be financially worth it for you. If you register your LLC in any other state other than the one where your rental property is located then you will end up paying far more in additional LLC rental fees which can add up to quite a big chunk of change in the long term.
If you are going to own or lease property in another state, then that is where you should form your LLC, since that is where you are legally doing business.
We have covered a lot of information in this article and we do hope that it was well worth your time to read through it, as knowing all the important information regarding LLC for property rentals is very important.
However if you do have any further questions or concerns, then feel free to get in touch with us at any time, we have many years of experience in the rental property space and will be more than happy to assist you with anything that you need. Get in touch with us here and we will do our best to get back to you as soon as possible with the answers to all your questions and concerns that you might have.