Rental Property Tax Implications (Personal - LLC)?

Question

Hi everyone -

I'm trying to understand what the benefits would be in moving a personally held rental property to an LLC.  Is there an attorney and/or accountant that can shed some light on this?

The rental property has been depreciated over the past 2 or 3 years of tax returns.

I'm in the process of closing on 4 properties in an LLC.  I'm trying to understand if there is a benefit to moving the other over as well.

Any advice/insight would be helpful.

Thank you,

John

Costin I. · Answer

@John M. Not a lawyer, but can tell you (AFAIK) a trust doesn't offer any liability protection, just a layer of anonymity. It complements an LLC (which gives you the legal protection) and are often setup together. Talk with @Scott Smith, he should be able to help you.

John M. · Answer

Thanks all, this is helpful.

I am more concerned about the legal aspect, rather than the tax impact (as there are little to no benefits with a single-member llc).  Are there any NJ attorneys that can help establish a trust? Discuss the benefits of anonymity between a trust and an llc?

Thanks again!

Costin I. · Answer

@John M. You'll have to elaborate on your question, or to expand on your situation/scenarios/goals to get an idea of possible other benefits. For sure, you'll have expenses and additional hassle, nothing comes free.

Like @Ashish Acharya mentioned, "if it was MMLLC, owned by you and your spouse, you could save some taxes if one of you had high paying W-2 job." - If one could qualify as "real estate professional" you might have more leeway on the 25K deduction limitations. If you have an LLC doing property management, you might be able to establish Solo 401K plan or even a MERP.

If you are talking about asset protection (which is main reason for LLC'ing), you are the one to judge your risk threshold, that is subjective to each person.

Here are some threads related to this question, so you can judge yourself on prevailing opinions:

https://www.biggerpockets.com/forums/51/topics/551672-asset-protectiondoes-it-even-matter

https://www.biggerpockets.com/forums/48/topics/509923-when-has-an-llc-actually-saved-your-assets

https://www.biggerpockets.com/forums/51/topics/551672-asset-protectiondoes-it-even-matter?page=1

https://www.biggerpockets.com/forums/51/topics/607544-been-sued-please-share?page=1

And here is a graphical representation:

Just my 2¢, not a lawyer, nor CPA, so take it all with due diligence.

Michael Plaks · Answer

@John M.

I will assume you're single and are talking about a single-member LLC you started, and you're buying 4 rental properties.

There will be no tax benefits in using the LLC, neither for the 4 new properties nor for the existing rental.

The reason to use the LLC will be legal protection, not taxes. There have been several threads recently on this forum debating various issues of asset protection. Please read them, with one caveat: ignore legal opinions of anybody except actual attorneys.

A major part of the discussions was whether you would need one or multiple LLCs for proper legal protection, or maybe even an out-of-state Series LLC. Again, this area is for attorneys, and I'm (luckily) not one of them.

Ashish Acharya · Answer

@John M. ,

If you are talking about Single Memer LLC, there are rarely any tax benefit. Not talking about legal benefits.

If it was MMLLC, owned by you and your spouse, you could save some taxes if one of you had high paying W-2 job.  I am not sure that is the case.  And partnership has to structured properly.

But, generally, LLC will not provide any tax benefits.

Rental Property Tax Implications (Personal -> LLC)?

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