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  1. #1

    Default Should You Use a LLC to Hold a Rental Property

    My question involves landlord-tenant law in the State of: California
    Hi
    We are looking at purchasing our first duplex as an investment. We will have 2 tenants.
    Some questions please:

    1. We have an existing corporation (INC) can we vest the duplex into the INC or form an LLC?
    2. Is an LLC even necessary or can we just vest into our Trust? We would have insurance, just wondering if an LLC is more protection as we do have other assets?
    3. Tax wise, does it matter if we vest it in our Trust, INC or LLC? I want to be able to write off expenses associated with the property.

    Thank you very much

  2. #2
    Join Date
    Mar 2013
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    17,060

    Default Re: LLC for a Rental Property

    Quote Quoting BettySueThomas
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    1. We have an existing corporation (INC) can we vest the duplex into the INC or form an LLC?
    2. Is an LLC even necessary or can we just vest into our Trust? We would have insurance, just wondering if an LLC is more protection as we do have other assets?
    I'll share with you my experience as a landlord. 20 years with 3 rentals. You don't need some fancy artificial entity to own your rental. No matter what kind of entity owns it, you, the person who deals directly with your tenants, will appear on the first line of a lawsuit right after the word "defendant." Your biggest liability issue is if your negligence causes injury to anybody on or at your property. You protect your assets by having the proper liability insurance.

    You can extend the liability coverage on your homeowners policy to "additional residence premises rented to others" for a nominal charge and buy a separate fire insurance policy (DP-3 Special Form) on the duplex or you can buy a combination policy with the building and liability coverage all in one.

    Either way, kick up your liability limits to $500,000 or $1,000,000 and you should be fine. If you have more than $1,000,000 in assets to protect you add a personal umbrella policy into the mix for as much coverage as you want.

    As for any other risk, landlord/tenant contractual matters are typically handled in small claims court so there isn't a lot of exposure there.

    Quote Quoting BettySueThomas
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    3. Tax wise, does it matter if we vest it in our Trust, INC or LLC? I want to be able to write off expenses associated with the property.
    Your trust can own the property. Just make sure it's listed on your insurance as an additional named insured for the liability coverage or buy the combination policy in the name of the trust with you, as individuals as additional named insureds.

    From a tax standpoint, whether it's owned by the trust or LLC, the trust and the LLC are disregarded entities for tax purposes and you show your rental income and expenses on Schedule E (which you can find on the IRS website).

    I don't know about the INC. Depends on what kind, though I'm not sure I see any advantage there either.

    We have a tax attorney who participates here who can shed some light on that.

    My vote, for the two cents that it's worth. Have the trust own it and beef up your liability insurance.

  3. #3
    Join Date
    Oct 2014
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    7,348

    Default Re: LLC for a Rental Property

    Quote Quoting BettySueThomas
    View Post

    1. We have an existing corporation (INC) can we vest the duplex into the INC or form an LLC?
    2. Is an LLC even necessary or can we just vest into our Trust? We would have insurance, just wondering if an LLC is more protection as we do have other assets?
    The rental property may be owned by the trust or the corporation or by a separate entity, like a LLC. Understand that the limited liability protection of a corporation or LLC is not absolute. Assuming that the corporation or LLC is run properly there are three main ways the owners of the limited liability entity may be personally liable for its debts:

    • The owner personally guarantees the debt. Experienced creditors of small businesses will always ask for the owners to guarantee a significant contract or loan that is made to a limited liability entity.
    • The owner is negligent when doing work on behalf of the entity. For example, if you do a repair on the property negligently and someone is injured as a result of it, you are always personally liable for that. Owning the property through a limited liability entity would not shield you from that. For this reason, you want to have sufficient insurance to cover that sort of thing.
    • The owner may be personally liable for certain debts by statute. For example, federal tax law makes the persons who are responsible for withholding tax from employees personally liable for the tax actually withheld if it is not paid over to the IRS.


    Note that if the rental is owned directly by the corporation or trust then ALL debts of the rental are obligations of the corporation or trust. That puts the assets of the corporation or trust at some risk. For that reason, it might be worthwhile having the corporation or trust own the rental property through a LLC that they own and have the LLC do the rental operations.


    Quote Quoting BettySueThomas
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    3. Tax wise, does it matter if we vest it in our Trust, INC or LLC? I want to be able to write off expenses associated with the property.
    The rental expenses are deductible in any case. But there are tax differences that occur depending on how it is owned.

    If the property is owned by an entity that is taxed as a C-corporation for federal tax purposes then the C-corporation includes the income and expenses of the rental on its return and pays any tax owed on the net income itself. This is significant because the tax rates for C-corporations are different than they are for individuals. Note too the owners of the C-corporation are taxed on the dividends they get from a C-corporation. Thus, the income of a C-corporation gets taxed twice: the corporation pays tax on it and then the owners pay tax on it too when the income is paid out in dividends.

    If the property is owned by an entity that is taxed as either a S-corporation or a partnernership for federal tax purposes then the income and deductions are included on the return for the S-corporation or partnership but the net income/loss of the S-corporation or partnership flow through to the owners and the owners ultimately pay the tax on the income.

    If a LLC has just a single owner then it is disregarded as separate from its owner and the single owner includes the income and deductions of the rental on the owner's return.

    If the property is owned by a trust, then it matters what kind of trust it is. If the trust is grantor trust under the Internal Revenue Code (IRC) then the trust is effectively ignored and the grantors are treated as though they directly own the assets of the trust and directly receive the income of the trust. In that case the income and expenses of the rental go directly on the grantor's tax returns. Revocable living trusts are the most common type of grantor trust. If the trust is not a grantor trust then the trust is treated as a separate entity and the income and deductions of the rental go on the trust return. What happens from there depends on the distributions form the trust. The trust might pay the tax on the income or the income may flow to the beneficiaries along with the distributions. The tax rates if the trust pays the tax are generally less favorable.

    By default a LLC with more than one owner is treated as partnership for federal tax purposes and a LLC with just one owner is, as I mentioned above, disregarded. However, the LLC may elect to be treated as a C-corporation instead and, if it qualifies, may also make the election to be treated as a S-corporation.

    Note that if you do elect to use a LLC for the rental (whether owned by you directly or by the corporation or trust) California imposes a franchise tax on that LLC. The minimum franchise tax is $800/year. So while you might get some greater asset protection using the LLC, it does come with the additional cost of the franchise tax.

  4. #4
    Join Date
    Jul 2018
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    1,544

    Default Re: LLC for a Rental Property

    Quote Quoting BettySueThomas
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    We are looking at purchasing our first duplex as an investment.
    Who exactly are "we"? You and a spouse? You and a boy/girlfriend? You and a business partner?


    Quote Quoting BettySueThomas
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    1. We have an existing corporation (INC) can we vest the duplex into the INC or form an LLC?
    Your post provides no information that would suggest that you lack the ability to do either of these things. Whether either would be a good idea is, of course, a question that no anonymous stranger on the internet is competent to answer.


    Quote Quoting BettySueThomas
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    2. Is an LLC even necessary or can we just vest into our Trust?
    You can, in theory, take title however you like (subject to the approval of the mortgage lender).


    Quote Quoting BettySueThomas
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    We would have insurance, just wondering if an LLC is more protection as we do have other assets?
    More protection as compared to what? What are you seeking to be protected against?


    Quote Quoting BettySueThomas
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    3. Tax wise, does it matter if we vest it in our Trust, INC or LLC?
    Yes.

    Your post suggests that you would be quite foolish to proceed further without advice from a local attorney.

  5. #5

    Default Re: LLC for a Rental Property

    Thank you

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