When to establish an LLC - Does timing matter?

[Lynne MacFarlane]

Hi BP! We are starting out and would like your advice. We have been reading that there are definite tax advantages to having your properties (as their associated income) contained within an LLC. As we haven’t established one yet, can anyone comment on the difficulty in transferring a property from individual ownership into an LLC, or should we establish the LLC first and have the LLC “purchase” the property directly from the seller? We are just trying to figure out if we need to go through this process now, or if we can wait and consolidate the properties under the LLC at a later date? Thank you, Lynne

[Natalie Kolodij]

@Lynne MacFarlane 

If you're just looking at an LLC for rentals there is no difference tax wise regarding if you have it in an LLC or not. The tax treatment is typically the same.

The one differentiating item is if the rentals are in a husband/ wife partnership and you live in a community property state -you have an option of reporting on a partnership return, or treating it as disregarding it and reporting it as normal on your personal return. 

While this doesn't have a direct tax impact- it can play into strategy in the big picture. 

Aside from that- it really comes down a question for yourself and your attorney. The LLC setup is more for protection in this situation than any tax matter. However, as mentioned above many people pierce the corporate veil. This is the separation of your business/personal. As soon as you are using personal funds for business/ vice versa....you can potentially open up your LLC and lose some of that protection.

Another consideration is the type of property- sometimes lenders want to see an LLC for commercial or hard money loans.

If you are looking to do flips the answer changes quite a bit- as it's active income- flips I typically like to see in an LLC because it gives us some options for later on that can provide significant savings.