Advantages of Forming a Real Estate Company for Rental Property Investing
Starting a limited liability company (LLC) for real estate rentals can be a good step when it comes to enjoying tax advantages and boosting your current real estate holdings’ worth. Similar to many investing strategies, there are lots of advantages that come with this option.
However, as LLC’s are regulated at the state level, starting one involves a process that differs from state to state. But the benefits below apply to all:
Controlled Personal Liability
When a lawsuit is filed against you over a property you own as an individual, every personal asset you have will be at risk. But with an LLC, only those assets owned by the LLC are affected. To put it simply, only your rental property suffers and your personal finances will be spared.
Rental Property Independence
Aside from keeping your business assets from your personal assets, you should also separate your rental properties from one another. If you have multiple properties, you can protect them individually with a separate LLC for each. Should a lawsuit be filed involving one of them, the others will stay intact and unaffected.
Pass-through taxation is a benefit enjoyed by individually owned businesses. Typically, corporations will be taxed on the profits they make, while individuals will again be taxed on their business-generated income. But with an LLC, the income produced by your business simply “passes through” to you being the owner. So any income generated by your LLC (your rental property) will fall under your individual income tax return, hence reducing the total amount removed from your income for taxes.
Easy Separation of Your Business and Personal Expenses
When you set up an LLC, you should open a new bank account dedicated to it. This will allow you to separate your personal from your business expenses. This way, claiming business expenses also becomes easier during tax season. As you look at your bank statements, you will clearly see which expenses were incurred for business or personal reasons.
When to Set Up an LLC
One question you may have is whether you should create an LLC before or after buying a rental property. It will actually work both ways, but there are benefits to doing it prior to the property purchase, such as not having to pay Title Transfer Tax, not having to update rental leases once the transfer is completed, and more.
If you decide to create an LLC first, the property can be bought in the LLC’s ownership (it will be your LLC’s name on the deed). If you already own the property, the deed must be transferred to the LLC.