Do you use LLC's for your rentals? pros and cons?

[Cynthia Miller]

Do you recommend forming and LLC for each property separately? Is it worth the cost? Also, am I correct if an LLC is registered in a state that has no state income tax I won't have to pay income tax on the rental income even if I reside in a state that has state income tax?

I was also read something about it's easier to pass it on to the kids.  Haven't researched it in depth  yet.

What are the pros and cons? 

[Stanley Bronstein]

Putting your properties in separate LLCs gives you some insulation from potential legal claims on a given property. For example, if something happens in Property #1 (Owned by LLC #1), they generally can't go against Property #2 (Owned by LLC#2), etc.

Having plenty of insurance is also important.

The main thing is that everything gets done on the up and up and get done properly.

As for state income tax liability, a lot of it depends on how the LLC is set up.

For IRS purposes (and many states) by default, a LLC that's owned by one person (or a husband and wife in a community property state), is usually what they call a Disregarded Entity. This entity does NOT generally file a separate federal return and all of the activity from it gets reported on your personal return and will undoubtedly also be shown on your state income tax return (depending on your state requirements, as some states have no individual tax return requirements).

For IRS purposes (and many states) by default, a LLC that's owned by two or more people (except for husband and wife in a community property state), is usually taxes as a partnership and it has to file a partnership tax return.

A LLC can also elect to be taxed as a corporation and even as an S corporation, but that's too complicated of a topic for this discussion.

Even if you wind up having a Disregarded Entity, many states might have annual filing requirements (such as California, Texas, Nevada and many others). California has a annual minimum tax of $800.

I probably should put together a webinar on this topic if there is enough interest among the BP members.