In the age of proliferation of Airbnb’s and rental or investment properties, how those properties are held (i.e., who owns the property) matters. With the often great reward of rental income from investment properties also comes a degree of risk, both legal and financial. However, if you own rental properties or are considering purchasing an investment property in the future, one way to protect yourself (and your property) is by forming a limited liability company (LLC). Here are the key reasons why:
Asset Protection
It’s no fun to think about all the things that could go wrong by renting out an investment property. Of those things, imagine how many could lead to legal consequences. What if there is an AC issue that causes your tenant to withhold rent? What if someone gets injured while staying at your Airbnb? Hopefully, you have insurance in place to address these scenarios. If a lawsuit arises, having an LLC is indispensable for protecting your personal assets.
By forming an LLC and deeding your rental property to the LLC, you essentially create another “bucket” of liability that is totally separate from your own personal assets. In the unfortunate event that you get sued by a tenant or guest, their only recourse would be against the assets of the LLC. Your own personal assets (e.g., your bank account, personal residence, etc.) are shielded from liability because your LLC is treated as a separate entity. If you don’t have an LLC and just own the property in your name, your personal assets could be at risk of being used to satisfy a judgment against you.
Also, if your rental business had financial difficulties, having an LLC would mean that the business’ creditors could only seek repayment from LLC assets. The business’ creditors generally would not be able to seek repayment from your own personal assets, so long as there was no personal guarantee made for the debt.
Business Credibility and Taxation
Another key benefit of having an LLC for your rental property is that it makes you appear more credible and legitimate to those looking to rent out your property. If you are going to take the leap of faith to start renting out an investment property, you should also commit to running your business like an actual business. Be careful not to blur the lines between yourself and your business – that can lead to trouble down the road, particularly in the form of losing the coveted asset protection mentioned above.
With your new business will come new taxes that must be paid, and having an LLC will allow you to opt for pass-through taxation. This means the profits and losses of the business “pass through” to your own personal tax return. This allows you to avoid double taxation on your rental income. This also makes doing taxes for your business much simpler.
Concluding Thoughts
Forming an LLC for your rental or investment property offers a comprehensive solution to safeguard your personal assets, enhance your business credibility, and simplify taxation. Most importantly, by creating a separate legal entity, you shield your personal assets from potential liabilities arising from rental property ownership. If you would like to set up an LLC for your investment properties, give us a call to schedule a free consultation today.