What is the best entity for holding real estate investments, especially rentals?
Typically, two considerations drive rental real estate business entity decisions: liability and tax; and of these, liability is the single most oft-cited reason why one would hold rental real estate as a business.
If a rental property is owned individually and personally (with or without others) then the owners are personally liable for any tenant and guest personal injuries, etc. While one should always have first-rate and extensive insurance coverage in order to cover any such risks, there is always the chance that coverage might be denied, lapse, or simply not be enough to cover a jury award.
Should You Form an LLC?
At Lytle Law we generally recommend rental properties be held in a limited liability company (LLC). An LLC is similar to a corporation in that it exists as a separate, legally recognized, entity, which will provide protection to its owners and managers from injuries to others (in other words, the assets of the LLC are the basis for collection, not your personal fortune). Tax-wise, an LLC does not pay income taxes. Rather, any income (or loss) is passed through to the members, who are treated as partners. Obviously, this is a simplification of tax treatment and options so always discuss the implications with your accountant or us.
If you are not presently holding your rental real estate in an LLC, or you are looking to acquire rental property, then let us know, and we will be happy to assist you in making an entity decision and implement it. It does not cost very much to do so, but it could cost you quite a bit if you do not.
Feel free to contact us, or Brian D. Lytle at Lytle Law (757-595-5655), for questions specific to your situation. We'd love to help!
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