First Rental- Should we set up an LLC?

[Anne H.]

Hello,

We are buying our first rental property in MN and are feeling a bit overwhelmed with all the info. We have learned a lot though so far through these forums! What we are currently not sure of is if we should be setting up an LLC or not. How do we best protect our personal assets?

My husband is a realtor so we do have an LLC set up for his business but that is managed by a CPA. In the brief conversation I had with her she didn't seem like a fan of the LLC route and mentioned something about a schedule E form.

Any advice would be greatly appreciated:) 

[David M.]

@Anne Hatfield

Not many people do. Just to give the other "half" of the opinion, many including bp members don't use LLC's for rentals. I just wrote about about in length today on another thread. They have a much greater cost to them than just some filing fees, both monetarily and operationally.

You never get a clear answer about how to protect your corporate veil with the exception of not co-mingling funds. It's been discussed about how to setup legal avenues so that funds aren't co-mingled when people take Title under the LLC but get a mortgage in their personal name. But, I persoanlly feel after the first time it's clear you are using the LLC as an alter-ego. I'm sure this is complicated because it's governed by State law. Also, I get the feeling that not too many people get sued — I haven't heard a discussion thread about that yet

So without a LLC, we just use insurance policies and umbrella policy.

As mentioned taxes are the same. There is no greater tax efficiency with a legal entity. As you asked, rental properties are reported on irs form SchE. Google and you’ll see what you can deduct. There are passive activity loss rules limiting howmmich you losses you can bring to your 1040, FYI.

All that being said, feel free to use a LLC. Please, if you go through all the effort please do it correctly.

To move funds around, follow lines or ownership/liability. Move funds between your bank account and the LLC's as owner draws or contributions to the LLC — there is no tax for doing that (so it too frequently it's been said is bad too sometime). Pay bills for the LLC only from the LLC bank account, eg taxes, utilities, repairs, mortgage, etc. if you make a mistake, I believe you need to make a draw in the exact amount and mark that entry to show the LLC is exactly covering the charge that came out of your personal account.

You should also talk to a lawyer, not only your cpa. The accounting isn't hard, just more work (they the your cpa will charge your for). But, the rest it all legal stuff since the LLC is for asset protection, not tax efficiency. Well, your accountant may like it that you use a separate bank account since it will make it easier for him/her to fish out the transactions instead of digging through your personal accounts. But, that depends on how. You work with your accountant. As you'll read on bp, some people start doing quickbooks after a 2-3 properties..

Good luck.