I was wondering if anyone could recommend how I should go about setting up an LLC for a rental property I have. I will also be purchasing more property to hold and also to flip.
My wife and I are doing this together with no partners and we live in Philadelphia. I don't know if there is a certain type of LLC that I should set up and also should a set up separate LLC's for the properties that I will be holding and the properties that I will be flipping? I'm new to all this so any feedback will prove helpful.
Thanks in advance,
I'm not an expert, but I've been doing some reading(dangerous), but since you're new, I imagine one LLC would do the trick. I've got 3 rentals and no LLCs at the moment(going to change this in 2017), but I would assume 1 LLC would provide enough protection, as long as you manage it correctly. Meaning any expenses on any of your properties, rentals or flips, needs to come from the LLC and not from your personal bank account. There are other components(which I encourage others to elaborate on and/or you to read up on), but the main thing is to absolutely keep the LLC account separate from your personal account(s).
It is generally better to keep flips and buy and holds separate. They are accounted for differently with buy and holds enjoying a favorable tax status to flips which are considered inventory. If you sell one of your rentals, you don't want the IRS claiming it was a flip and trying to tax you accordingly. You may win that argument if you have the right documentation and bookkeeping, but trust me you do not want to fight the IRS. That is a miserable, exhausting, time consuming process, even if you are 100% right. Just don't even go there. There are other reasons to keep them separate as well but that's a big one in my book.
From I have read from the forums, it is recommended to form LLC for passive income from rental properties, and regular S-Corp incorporated for active income like flips or wholesaling.
Again for rental properties, it is recommended to create "Series" LLC, meaning having all rentals under one master LLC, at the same time treating each rental as individual LLC. This provides better protection: in case you get sued for one rental, other rentals are protected from the lawsuit.
I have just put my first rental BRRRR under contract last week. I plan to form the LLC after taking out refi loan, and transfer the property to LLC.
Thank you for the responses, Nirmal I figured I would have to do something along the lines of what you said in order to protect myself the most I can. I just wasn't sure what the different LLC's were called. From what I understand from the replies:
A series LLC is an LLC which acts as an LLC in itself but also has some type of subcategories where you can section off each property to be it's own entity?
@Mike Lightcap , LLC law, or business entity law (or any law for that matter), is very state specific. Few states specifically address series LLCs and they are relatively new so there is not a lot of precedence in how they will be treated. In a state that does specifically address them, such as Texas, they are a safer bet then in ones that don't. The laws of the state that you are doing business in will prevail. Point is, a series LLC may not be honored in your state. I have no idea about PA so I will give the standard answer, contact a local attorney or one that is more familiar with the laws of your state.
It may make sense to use an S Corp if you are generating earned income. Then again it may not. S Corps have their drawbacks, though, and are not the right answer in every situation. Again these questions are very specific to your situation so I will give the standard answer which is to talk to your accountant.
I would talk with either a CPA, or an attorney in the state that you are doing business. Also would talk with an insurance agent about both. You may be able to find all of the above at a local REI Club or try a search of this site. Hope that this helps.
As a Realtor that specializes in working with investors, I've seen it done quite a few ways. I'd be happy to talk to you about them and also can give you referrals for someone to handle the legal work if your interested. It's been helpful for some of my clients in the past.
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