Umbrella Insurance VS LLC tax question

6 Replies

I have my first rental property and have been considering getting umbrella insurance on the property and not setting up an LLC for it. How does this work from a tax perspective? Do the tenants write the checks out to me personally? At the end of the year when i file taxes do i claim it as income in addition to my salary from my full time job or is there a special process i need to follow to claim that rental income? Will i be taxed at a higher rate considering i dont have an LLC? Can i get the same deductions on repairs on the house or office supplies if i dont have an LLC?

I live in GA and the property is in GA.

Thanks in advance

Originally posted by @Jef A. :

I have my first rental property and have been considering getting umbrella insurance on the property and not setting up an LLC for it. How does this work from a tax perspective? Do the tenants write the checks out to me personally? At the end of the year when i file taxes do i claim it as income in addition to my salary from my full time job or is there a special process i need to follow to claim that rental income? Will i be taxed at a higher rate considering i dont have an LLC? Can i get the same deductions on repairs on the house or office supplies if i dont have an LLC?

I live in GA and the property is in GA.

Thanks in advance

Jeff , what you are asking is tax 101. 

LLC does not change your tax. LLC is a legal entity, not a tax classification. You will get the same deduction with or without LLC.

If you dont have LLC, your lease agreement will be between you and the tenant. So yes, tenant will pay you. From tax perfective, you will have to claim all the rental income and expense in your personal return under schedule E ( with or without you single member LLC). Yes if you have net income from your rental activity, it gets added to your W-2 income when determining your tax bracket for tax. Normally, depreciation will generate tax loss in the iniital years.

There is no special process, you need to just report the activity in your return. 

You might want to talk to professional. @Eamonn McElroy is in GA too. Talk to him. 

Hi Jef!

I am not a CPA and don't play one on the internet, so this is just my opinion.

I put my first rental into my own name, even though I had an LLC at the time that I could have put it into. The main reason for this was because of financing - if you put it into an LLC's name, then you will have to get a commercial loan instead of a residential loan. Residential loans are much better than commercial loans.

Lots of investors put all their properties into their own name, and just keep really good insurance. And this almost always works out just fine.

Almost being the operative word there - an LLC provides protection that can't be achieved with insurance alone.

The good news with taxes is that a single-member LLC (if you or you and your spouse own the whole LLC) is considered a pass-through entity. This means that the company's taxes are passed right through to you, so you file them along with your personal tax returns. The difference in taxes is not something to worry about. If you own the rental personally, its taxes will get paid along with your personal taxes. If your single-member LLC owns the rental, then its taxes will ALSO get paid along with your personal taxes. There is no special process for claiming that rental income, and you'll get taxed at the same rate.

You can claim the same deductions for repairs and improvement costs, although the bookkeeping is easier if your personal finances are separated from the business finances. This is often achieved through having an LLC with its own bank accounts.

Cheers!

@Ashish Acharya @Clark Kirkpatrick

This is FANTASTIC information!

I think since i am just starting out i will hold off with the LLC and proceed with the umbrella insurance. I was really curious if i would loose out on some tax benefits if i didnt have the LLC but since that is not a factor i think it would be easiest to get started without it.

Thank you both for this information!

I have several rentals that are all covered by my umbrella policy (it also covers various other unrelated risks / concerns). LLCs are cost prohibitive in CA so umbrella actually works incredibly well at a very modest cost.

Originally posted by @Jef A. :

I have my first rental property and have been considering getting umbrella insurance on the property and not setting up an LLC for it. How does this work from a tax perspective? Do the tenants write the checks out to me personally? At the end of the year when i file taxes do i claim it as income in addition to my salary from my full time job or is there a special process i need to follow to claim that rental income? Will i be taxed at a higher rate considering i dont have an LLC? Can i get the same deductions on repairs on the house or office supplies if i dont have an LLC?

I live in GA and the property is in GA.

Thanks in advance

 Hey Jef,

As mentioned above - the LLC wont change much in term of taxes, though some wizards can find ways to save money. The main purpose of the LLC is to provide liability protection between yourself and the property you own, so to answer your question isn't an either/or but a both/and. The one conception I do throw in there for investors just starting in investing is that early on investors may be inclined to cut costs to leverage their money to grow faster - it's an understandable strategy but comes with it's own risks. A good umbrella insurance policy will help protect you, but it only covers "accidents, and since you are new you are much more likely than an experienced investor to make mistakes that smark insurance companies include in their exclusions.

Two main strategies for investors just starting out would be: (1) start with LLCs and no insurance [limits your exposure to just the property in question] or (2) really good insurance [covers most issues, but your personal assets and other investments are still exposed.] I would encourage you to check out this article which explains asset protection from a "birds-eye view" perspective, explaining how the different peices come together to protect you.

Best of luck moving forward. Feel free to let me know if you have more questions.

@Jef A., 

An LLC is beneficial for tax, accounting and privacy purposes.

An LLC with a business bank account allows you to keep your personal and business income and expenses separate. This is helpful come tax time.

It also provides some privacy since your tenants will be making payments to your LLC instead of you.

Good luck and let me know if I can be of assistance.