The Pros and Cons of Putting Rental Property in an LLC
If you have rental properties or are considering purchasing rental properties, you may wonder whether or not to form a Limited Liability Company (LLC) to attempt to protect yourself and your assets. Unfortunately, the answer is not clear cut, and there are both pros and cons that must be weighed when making the decision to put rental property in an LLC.
Pros of an LLC
There are many advantages to establishing an LLC for your rental properties. Depending on your specific situation and unique circumstances, the following may be considered “pros” for making the decision to form an LLC.
- Asset Protection. One of the main reasons that rental property owners decide to create an LLC is to limit personal liability. In our litigious society, lawsuits are common, and no property owner wants to place his or her own personal assets at risk.
- Tax Advantages. An LLC has the option of being taxed as a “pass-through” entity, which means that any income and/or capital gains pass directly to you, the owner. Taxes are paid as an individual taxpayer, yet you still are afforded protections through the LLC.
- With an LLC, you will not have to put your own personal name on the deed, which will ultimately become public knowledge. If you create a holding company in a state that allows for anonymity then it will make it more challenging for anyone to determine who the actual owner of the property is.
Cons of an LLC
While there are several substantial advantages to the creation of an LLC regarding your rental properties, there are disadvantages, as well. Some of the most common disadvantages include the following:
- An LLC costs more money than not creating any kind of entity. LLC costs can vary depending on who creates your LLC and what kind of tax preparation you will need.
- Possible Lack of Asset Protection. While asset protection was listed as an advantage, the truth is that having an LLC does not necessarily completely insulate the owner from full liability. There are some situations where having an LLC will not offer much protection at all. Specifics listed in an operating agreement, as well as business practices, can change the level of asset protection afforded by the establishment of an LLC.
- Attempting to purchase a property such as a home, duplex, or townhome can be challenging as an LLC, instead of as an individual person. Many lenders will not allow a person to borrow money to finance the purchase of a property under the name of an LLC, but require an actual person’s name. Understandably, they want to hold someone personally liable if there is any issue in the future regarding payments. There are other options, such as paying in cash, or deeding the property to the LLC after you purchase it in your own personal name.
- Due-On-Sale. If you attempt the last move to deed the property to your LLC after you purchase it, then the lender may see that as a complete change of ownership and require full repayment of the loan. Whether this happens or not is a gamble, and entirely up to the lender.
Contact an Experienced Estate Attorney
If you are an owner of rental properties or are considering owning rental properties, you may be confused about whether or not you should establish an LLC. Contact the Law Office of Kris Mukherji at (858) 442-5747 to learn how best you can protect yourself and what structure will work best for your business.