Ownership of Rental Properties

This article will look at the various types of entities for rental property ownership. Below, you’ll see different entities have their disadvantages and advantages. In any case, the aim is to limit liability and guard your property from any unsecured creditors.

Also seek the counsel of an attorney or a certified public accountant well before establishing an entity and transferring ownership of a rental property. Do note, this is not a reasonable alternative for professional council.

TIP: Seek the counsel of a tax attorney or CPA before establishing an entity and transferring ownership of a rental property. This landlord tax guide is just not meant to be a comprehensive solution you should seek the care of a qualified professional.

Individual Ownership

This is the simpler and more widespread method of taking ownership. This is when you purchase a property in your own name. A big disadvantage of this type of ownership is that your creditors may be able to force a sale of the rental property if they receive court mandate, or they might compel you into involuntary bankruptcy. A big plus to this form of ownership is that the process is simple, without complicated forms or heavy filing fees.

Legal Entity Ownership

Legal entities include limited liability companies, corporations, general partnerships, and limited partnerships. Let’s look at the differences in a bit. Now let’s look at the major benefit of entity ownership, that being with entity ownership your personal creditors cannot force a sale of the rental property. The only entity type that does not require registration with the secretary of state is a general partnership. Regarding taxes, you’ll see the entity type doesn’t matter that much because in most cases rental income is taxed on your personal tax return, or “passes through”, See the article titled “Necessary Tax Forms for Reporting Rental Activity,” which is included in the rental property Tax Guide.

General partnership. This form of ownership takes place when two or more persons co-own a for profit business. With this general partnership the partners have equal management privileges, but also each partner is personally liable for the debts of the partnership. And for this reason a general partnership is usually not preferred.

Limited partnership. This entity is more complex than the general partnership because it requires at least one limited partner and a general partner. The general partner has sole management rights, coupled with personal liability for any debts. Whereas, the limited partner isn’t personally liable for debts of the partnership and likewise has no management rights. This entity selection is generally not recommended.

Limited liability partnerships (LLPs) or limited liability company (LLCs). A limited liability partnership and a limited liability company are similar forms of entity selection. Both provide limited liability to the members/partners. Meaning that you are not personally liable for the entity’s debts, that is, unless the catalyst was your own wrongdoing. This form of ownership is often preferable as it will reduce liability and presents with fewer formalities than those of the corporation.

Corporations. This form of ownership delivers limited liability and allows for perpetual existence. Although this form of ownership requires the maintenance of special formalities in order to maintain this limited liability guard. Thus for this reason that LLCs and LLPs are often times more apt to your purposes. Also worthy of mentioning is that corporations fall under one of two classifications: c-corp or s-corp. When a corporate entity is taxed as a c-corporation, then it pays tax on rental income, and then you’ll pay tax (again) when the c-corporation pays dividends. And it is preferred to avoid the double-taxation trap whenever possible.

Tax Accountant +John Huddleston has written prolifically on accounting and tax preparation. He is a graduate of the University of Washington School of Law.