Owner Occupied Duplex - LLC for Property Management?

Question

Hello all,

I've been a longtime student of BiggerPockets and recently made the jump into my first purchase. My girlfriend and I recently bought a duplex and will be occupying one side and renting out the other. The property is held in our personal names as tenants in common (50/50) using an FHA loan. I am wondering if it would be advantageous to create an LLC to run the income and expenses through with each of us owning 50% of the LLC. This would make keeping track of the income and expenses easier (in my opinion), however how would this be reported on our tax returns? I'm assuming the property would still be reported under Schedule E, but would any of the income/expenses be reported under Schedule C? Or would everything go under Schedule E?

Our future plan is to move out in 2-3 years and move on to the next property upon which we would create a separate RE holding LLC at that time for that specific property. The original LLC could then be used as a parent holding entity and/or property management entity for any future acquisitions.

Thanks for reading! Appreciate any advice

Carl Hebert · Answer

@Corey Chambers, I do not think you need to concern yourself with forming an LLC right now. The biggest reason to have an LLC is to help protect against litigation and ensure you don't have personal assets taken in a lawsuit against you. The key here is that the building needs to be in the LLC's name and that can be tricky sometimes depending on the state your in.

If your only concern is to track income/expenses then just use Quickbooks or its equivalent and setup accounts for the property.

Once you start building beyond this first property an LLC may be the right way to go, but in my opinion right now you are just wasting money and time setting one up.

The tax question I will leave to the accountants out there :)

Drew Sygit · Answer

You stated you & your girlfiend bought it together, so some questions:

1) What happens if one of you is suddenly incapacitated or dies? Does the survivor get the other 50% or do they have to deal with relatives that may be greedy?

2) What happens if you break up and one wants their investment out now?

3) What happens if one of you drinks & drives, killing someone and getting sued by the victim's famly? How would the other partner be protected from that?

So, why wouldn't you want to hire an attorney to create a partnership agreement and perhaps an LLC to cover as much of the above as posible?

Corey Chambers · Answer

@Carl Hebert thanks for the advice - the main goal now is tracking and reporting income and expenses, but that shouldn't be too difficult given its only the one property. I'll have to look into some of the different accounting software, but am rather proficient with excel and am creating my own spreadsheets for the meantime. The LLC path may be best to wait for now and just report everything personally given the points you made.