LLC for one property -yay or nay?

Question

I am hopeful that this question is not too basic.  :)  I have one rental property and wanting an LLC to manage expenses (avoid co mingling) and set up a more professional business structure for future purposes.   Questions-

-Is this wise?  My CPA has advised that there is no tax advantage (I won't be transferring the property to the LLC) and that the income I run through the LLC related to the property may then be subject to additional taxation.  Is this correct?

-What is the most cost effective way to establish an LLC?

-Should the LLC be established in the State where I own the property (and future properties)?

THANK YOU!!

Elizabeth

David M. · Answer

@Elizabeth Conklin

While I agree with the above thoughts, I am not sure it goes directly to your question.

If you are planning to scale, it MIGHT be useful to have a "mgt LLC" for the branding and "professiona business" that you were asking about.  Of course, you could do the same thing with a sole proprietorship which really would cost  you nothing.  Nothing in your OP suggests you are looking for the limited liability protection of the LLC, especially since you specifically stated you were not transferring Title.

LLC in general are pass through entities.  It shouldn't change your taxation unless you elect to be taxed as a C Corp or S Corp...  If you are the only member, the IRS "disregards" the entity and treats it like a sole propreitorship so you just attach a SchC or SchE with your 1040 filing.  Its "easy," and everything is taxed along with the rest of your finances.

If you were holding Title, you'd want the LLC to be in the same state as the property so that the Title holder would have legal standing in the court should you need to go there (with an attorney of course)...  However, I THINK for a mgt LLC it wouldn't matter.

Does this help?  Hope it does.  Good luck.

Chris Seveney · Answer

nay. no reason to setup a LLC for a single property. Get an insurance policy for liability coverage.

Kevin Sobilo · Answer

@Elizabeth Conklin, a single member (one owner) LLC is a considered disregarded entity by the IRS. So, there is no difference in taxation at all.

Whether you should get one or not is an OFTEN debated topic.

I think the biggest reason to decide whether to use an LLC or not in most cases is which state you are in. In some states starting and maintaining an LLC is pretty expensive. So, it doesn't make sense for a very small venture but in some states its DIRT cheap.

So, here are some benefits of having an LLC.

1) If you live in a state where an LLC is cheap then its cheap protection of your personal assets or assets within another LLC as long as you run it like a business.

2) Anonymity. If you choose to hire a PM, a tenant will likely never even know you are the owner. Even if you self manage some landlords only tell tenants they are the PM not the owner. (I don't advocate lying like that).

3) Debt doesn't have to be in your name. If you use loans in the LLC's name, you will likely be a personal guarantor on the loan, but it doesn't show up on your credit and therefore should affect your debt to income ratios for getting personal loans/mortgages.

4) If you chose to, in theory you could sell the LLC instead of the real estate and potentially avoid many closing costs related to real estate.

There are more reasons, but to me the biggest decider is whether its cheap and easy to have an LLC in your state. You can always get an umbrella policy in addition to the LLC as well.

Bill B. · Answer

No, you definitely don’t need one, and I’d say don’t want one. There is no tax advantage, you’re adding costs and complexity today and in the future if you ever want to refinance. It’s disregarded for tax purposes so it won’t help your personal finances. Or it’s not disregarded, and you will be taxed twice as your cpa said.

If your net worth is over $1 million, buy an umbrella policy, you are 10 more likely to be sued personally than your property is. If your net worth is between $500k and $1mill you can either raise your limits or buy the umbrella, which ever is cheaper and lets you sleep better.

LLC for one property -yay or nay?

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