Rental properties can be a great investment for savvy investors. And using a limited liability company (LLC) to hold rentals can provide an investor with benefits they would not get by holding their properties in a corporation or under their own name. The main benefits investors can receive by holding their rental properties in LLCs are protection of their personal assets, personal anonymity, and tax benefits. This blog post will explain these three main benefits in greater detail after first explaining what LLCs are and what function they perform.
LLCs allow investors to protect themselves from personal responsibility for debts, liabilities, and lawsuits involving their business. Business owners form LLCs by paying a registration fee and filing documents with the Secretary of State in the state where their business is located. You can read more about forming LLCs in our blog post on the subject.
As the name implies, LLCs limit liability for the business owner. Yet business owners need to be careful to follow the legal requirements for owning and operating an LLC because otherwise they may lose the protections afforded them by limited liability. Loss of limited liability status frequently happens through what is called a “piercing the corporate veil” lawsuit, which you can read more about here.
The biggest advantage of using an LLC to hold rental properties is limiting the owner’s liability. Lawsuits, debts, and liabilities involving a property held in an LLC will not affect the owner’s personal assets so long as the LLC was properly formed and maintained. In such a situation the owner would only have to pay out of the assets owned by the LLC, not the owner’s personal assets. And owners of multiple rentals can benefit from forming a separate LLC for each property they own rather than holding them all in a single LLC. Holding rentals separately in this way can be advantageous because creditors having rights to assets related to a property because of debts, liabilities, or a judgment from a lawsuit could only collect from the owner’s assets in the LLC holding that specific property. The creditors in this situation would not be able to come after the owner’s personal assets or assets from LLCs holding the owner’s other properties. LLCs can therefore offer investors valuable protection of their assets.
Holding a property in an LLC provides a level of anonymity to the owner of the property. An LLC will not disclose the names of its owner or owners on any public records if it is structured and organized properly, and this can be an important benefit for investors who want to keep their names and investments private. But LLCs cannot guard the identities of their owners in all circumstances. For example, certain regulations might mandate disclosure of the owner’s information in some situations, and disclosure of the owner’s identity may be necessary during a lawsuit involving the property.
Using LLCs can provide tax benefits to rental property owners that they would not get by holding their property in a corporation. Unlike corporations, LLCs are not taxed separately from their owners. This means property owners who use LLCs to hold their rentals do not have to pay taxes twice, which they would have to do if they formed a corporation to hold their properties instead. Also, an LLC’s owner can sometimes claim the LLC’s losses as personal losses for the purpose of calculating the owner’s income tax liability. And owners of single-member LLCs may be able to deduct the mortgage interest they pay on their rentals as a business expense.
If you are interested in forming LLCs to hold rental properties, contact the Indiana real estate attorneys at McNeelyLaw today. Our experienced team of attorneys can assist you with all your business and real estate needs.
This McNeelyLaw LLP publication should not be construed as legal advice or legal opinion of any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.