Getting into rental arbitrage - with or without an LLC?

[Kyle Milani]

I am looking to nail down my first lease in Florida. I currently do not have an LLC yet, it's going to take at least another 30 days. I have found I property that I like but don't feel that it will still be available in 30 days? Should I move forward without the LLC and put the lease in my name?

[Basit Siddiqi]

Quote from @Darren Pettyjohn:

In my experience, there are two main reasons to create an LLC; tax liability and bodily injury liability. The first is potential tax advantages, as the LLC is a business, and you can write more things off associated with the business than you can with just the rental property,a nd get a favorable tax bracket. I.e., I own a few long-term rentals in my personal name, and my accountant files them on schedule E (1040) as supplemental rental income. And I do get to write off standard expenses associated with the rentals, such as insurance, utilities, repairs, advertising, etc. BUT, whatever is left over is added and counted as normal income and I'm in the highest tax bracket; that sucks! So easy example, let's say after expenses, my net rental income is $10,000, well with the feds, I'm in the 37% group, so they get $3,700 in tax. But, if I had my rental in an LLC, I would pay the fed rate of 21% on business income, so I would only one the feds $2,100 in tax liability! Plus, you can likely sneak a few more deductions into your LLC, than you can the 1040. The second issue is a liability as, in theory, the LLC provides a layer of protection in that the potential claimant can't penetrate into your personal assets; the LLC would simply file bankruptcy, and that would be it. But wait, lawyers are crafty, and judges are reasonable, so, to the earlier comment, the LLC better have some assets, such as the rental; otherwise any good attorney will penetrate through the LLC and get to your personal assets in the event of a bodily injury lawsuit. Another example here. You run an STR and a guest dies from carbon monoxide poisoning, which happens, another story for another day, and the family sues you. Hopefully, you have good insurance, but let's say you are held liable for $2M dollars, and your insurance $1M as that's the limit. Where does the other $1M come from? In theory, you could forfeit your business assets to the plaintiff, say $500k in the property itself, and be done, as that is all the assets in the LLC. Or does the lawyer get past the LLC and take your personal home? That is the question. In my professional career, which is insurance, I've seen and defended many $1M lawsuits, and paid them out. There is no perfect answer, but creating an LLC is never a bad idea, as it helps on taxes, and could really help on a bodily injury lawsuit.

This post is wrong when it comes to taxes.
If you are mentioning 21%, I assume you are talking about your accountant suggesting an LLC to be taxed as a C-Corporation.

You did not mention how the cash will flow to the owners/members which may count as a dividend which if the taxpayer is in the top bracket, likely be close to 20% Federal Income tax, 3.8% net investment income taxes and state taxes.

Furthermore, if you are operating at a loss, losses are stuck at the C-Corporation level and do not pass to the owners/members.