Skip to content
General Landlording & Rental Properties

User Stats

1
Posts
0
Votes
Joshua DeGroate
0
Votes |
1
Posts

Moving into new home, renting out old home. LLC concerns.

Joshua DeGroate
Posted May 11 2023, 17:46

Hey all,

My wife and I recently went under contract on a new home. Our intentions are to rent out the house we are currently living in. We want to start an LLC for the tax benefits of being landlords and managing the property ourselves. Here is where I'm stuck: do we absolutely have to put the LLC on the house title to get the benefits? Can I start up an LLC with the wife and justify the business expenses of managing the old property? This is our first big investment move and I'm just trying to get some clarification,/guidance.

Thanks!

User Stats

3,428
Posts
4,914
Votes
Greg Scott
Pro Member
  • Rental Property Investor
  • SE Michigan
4,914
Votes |
3,428
Posts
Greg Scott
Pro Member
  • Rental Property Investor
  • SE Michigan
Replied May 11 2023, 19:03

For most people in real estate an LLC is called a pass-through entity. In other words it is invisible from a tax perspective. It neither adds nor detracts anything tax-wise.

Before you make a move, get a real-estate friendly CPA and chat with them.

User Stats

14,026
Posts
11,298
Votes
Chris Seveney
Pro Member
#2 All Forums Contributor
  • Investor
  • Virginia
11,298
Votes |
14,026
Posts
Chris Seveney
Pro Member
#2 All Forums Contributor
  • Investor
  • Virginia
Replied May 11 2023, 19:29

@Joshua DeGroate

The only thing an LLC will do for you is increase your costs. It does nothing for tax benefits. As noted it's a pass through entity, meaning it gets rolled up onto your taxes

If you have two people on the LLc then you get the joy of paying to have K-1’s completed.

FlipSystem logo
FlipSystem
|
Sponsored
Learn From Our Team. Earn 100% of the Profits. Join our community of 500+ investors! Avg profit per flip: $14k, Avg effort per week: 4hrs

User Stats

24,939
Posts
37,096
Votes
Nathan Gesner
  • Real Estate Broker
  • Cody, WY
37,096
Votes |
24,939
Posts
Nathan Gesner
  • Real Estate Broker
  • Cody, WY
ModeratorReplied May 12 2023, 04:58
Quote from @Joshua DeGroate:

I will add the third voice of reason. An LLC does not give you any tax benefits.

An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.

Warning: I am not an attorney and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.

ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appears on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.

LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.

Additional thoughts:

1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.

2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.

3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.

4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.

5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 12 years experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.

If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is likely to be higher, then you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require additional, on-going effort to maintain.

  • Property Manager Wyoming (#12599)

American West Realty & Management Logo

User Stats

289
Posts
264
Votes
Tanner Pile
  • Real Estate Broker
  • Colorado Springs, CO
264
Votes |
289
Posts
Tanner Pile
  • Real Estate Broker
  • Colorado Springs, CO
Replied May 12 2023, 09:52

@Joshua DeGroate

Everyone gave great advice. With only one rental property you do not need to put it into an LLC typically most begin to do that when they have partners on deals or after 2 or 3 rentals.

User Stats

3,459
Posts
4,422
Votes
James Hamling#3 Real Estate News & Current Events Contributor
  • Real Estate Broker
  • Twin Cities, MN
4,422
Votes |
3,459
Posts
James Hamling#3 Real Estate News & Current Events Contributor
  • Real Estate Broker
  • Twin Cities, MN
Replied May 12 2023, 10:48

@Joshua DeGroate all the good comments here speak back to the fundamental requirement for your "Core Four" or simpler said "Have People For That".

Keep in mind if your a Landlord, your trying to run a business. I know, we call it Real Estate Investment, it is better said a Housing Business. You need a go-to Attorney and CPA, both experienced in real estate and specialized with investment real estate.