Should I have a LLC?

Question

What’s the best business structure for rental property tax wise?

Do I pay quarterly taxes?

What all can be written off and what should I be keeping track of monthly?

What forms will I need to fill out?

Anything special to know tax wise that one property i own is a mixed use commercial property that’s primarily used for rentals/residences? Whereas the other unit is a single family house.

Do you recommend I have a dedicated bank account and credit card for this business/real estate?

Anything else I need to know or advice you have for protecting myself and the profits?

Lance Lvovsky · Answer

1. It depends. Speak to a CPA and attorney. Generally, do not hold rental real estate in a C or S Corporation. Other entity types such as LLCs afford more flexibility.

2. Estimated quarterly taxes are required when withholding does not cover estimated tax bill. Your CPA should further advise you.

3. All ordinary and necessary expenses of running the business. Insurance, property tax, maintenance, etc. Track all expenses.

4. It depends on entity selection.

5. Yes.

6. Yes.

7. Yes. Speak to your tax advisors.

Christopher Smith · Answer

I've yet in over 20 years as a landlord to ever personally know of anyone that has avoided 1 dollar of personal liability by using an LLC. Although I'm sure there is at least one person out there somewhere who has saved at least 1dollar.

Joe Scaparra · Answer

When talking about an LLC you should be aware of the problems dealing with them.  I think a savvy lawyer can pierce the veil of an LLC.  Lenders are not fond dealing with LLC.  For those who have multiple properties, having a LLC for each property can be cumbersome.  The new or relatively new Series LLC is untested in most states.  For each LLC you have to have a separate bank account and all monies dealing with the property must go in and out of that account no exceptions and cannot be used for other properties outside the LLC. A problem may arise when you have multiple properties in one LLC that are paid off.  The question becomes how am I limiting my exposure when the LLC is worth a lot of $$$$. One alternative is the use of a umbrella policy.......no?

Justin Gottuso · Answer

@Shawn Spato

Yep, paid that last year. But I just moved to Ohio and it’s much cheaper.￼

Calvin Ozanick · Answer

I would always stay to stick off BP for tax and legal advice. However, one thing I do know, is I cannot think of a scenario where the liability that comes from buying in your own name is worth the lower rates on investing. LLC is the way to go.

Mark Davidson · Answer

I worried about this topic as much as anyone.  When one of the top attorneys in town was assisting me with another matter that was not a liability issue, I mentioned my LLC and he scoffed.  He schooled me, and unfortunately, the gentleman above is correct, it's not a magic unicorn.

Eamonn McElroy · Answer

I am not an attorney, so consult one first, but there is broad misconception about the protection offered by LLCs on this sub-forum.

If you are both the owner and manager of the LLC (i.e. "managing-member"), both you as an individual and the LLC will be named in any lawsuit for any torts you commit as manager.  It will happen.  Your personal assets will be on the line.  A bunch of people either don't understand this or choose to ignore it.

An LLC is not a get out of jail free card.  It can help, and I believe an LLC is an automatic no-brainer as long as there are no egregious externalities (CA LLC tax), but strong insurance and keeping everything above-board as far as practices go is much more important IMHO.

Christopher Smith · Answer

No not at all, nothing could be further from reality.

1) Due diligence in managing your operations should render tenant suits virtually non existent (if you are performing such due diligence as you should be doing it). I've had all my properties in all jurisdictions that I own them professionally managed at all levels of operation. Never had a suit, or even the intimation of a meaningful suit in well over 20 years of active operations, nor do I know of any other landlord like myself that has. Urban legend has it there is a mythical unicorn out there somewhere running loose, but I have yet to see it.

2) You should have basic liability insurance on each property in that exceedingly rare event where an otherwise properly managed property runs into an extreme outlier. As I've indicated, I've never seen that with well managed properties, but if it did happen your individual liability coverage should be far more than adequate to address most if not all events. I'll assume you have a quality carrier as you should if you are really serious about mitigating risk.

3) Let say you do run into that mythical ephemeral unicorn that urban legend says exists (but that we have never seen yet), get an umbrella insurance policy as a third tier back up, its exceedingly cheap (a couple hundred dollars) for literally millions of dollars worth of coverage. BTW your real risks very likely won't come from the properties you manage (unless you are selecting some real dogs properties with a commensurately inferior level of management), but outside activities (e.g., say you get silly drunk and kill while driving kill a whole family of doctors in an SUV).

In conclusion, let me borrow from WC on this one (i.e., the need for an LLC by mom and pop landlords as the vast majority of us are).

Never in the history of mankind has so much been wasted, by so many, for so little.

Justin Gottuso · Answer

@Christopher Smith but what if a tenant sues me? Without the legal protections of a LLC, I’m a sitting duck, right? Then they can come after my personal property even though it’s related to the rental property. Right?￼￼

Shawn S. · Answer

@Justin Gottuso Important note in my opinion is that California LLC’s have a minimum tax of $800 annually regardless if you do business or not.

Should I have a LLC?

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