Should I put my Rentals under a LLC

27 Replies

Hi, my husband and I recently purchased 2 duplexes in the north Texas area under our names. We are wondering if we should put the leases under our LLC as a way to protect ourselves? Is there any tax benefits for leaving the leases under our name or LLC. We are brand new to this and bigger pockets’ podcast and this forum has made a huge impact on our lives and changing the trajectory of our future. Cheers to more rentals and possible flips. Thank you in advance for your advice.

No, there's a question or two on this every month and the answer is no in your case. Assume you'll self manage. I did rentals for over 35 years never used one though I owned businesses in LLC's and S Corps. Big reason is people believed they can't get sued, but attorneys sue you anyway. When you get liability insurance for the LLC, you have to get an endorsement to cover yourself for this reason. You have to get a business checking account which is more expensive.

I bought a business from an owner with an S Corp. had insurance for the S Corp, but not for himself. Was sued for more than his coverage in the S Corp, his insurance told him, over the limit, you're on your own.

Bottom line, get plenty of insurance.

I'll try to answer your specific questions here rather than taking a sidebar down the "should I set up an LLC" topic, which you'll invariably receive responses regarding such - 50% are against and 50% favor the idea.

Preliminary questions; have you Quitclaimed or Warranty Deeded the property from your names to the LLC in your name? If not, you need to check with your lender to see if its allowable and doesn't violate the "due on transfer" clause. Secondly, you need to confirm with your Title company that the title insurance isn't waived if its transferred. If these have been cleared up you'll also need to transfer the house insurance into the name of the LLC, which also includes your personal name as the insured. I did this on my properties and then I had the leases represent the LLC.

These steps don't fulfill Asset Protection, but its a step in the right direction.  The topic of asset protection has been fleshed out extensively here on BP so no need to repeat it here.  You can simply do a search on the topic.  

There's a lot of info here;

https://www.biggerpockets.com/forums/92/topics/244...

although its more about a third party company offer a WY "charging order" strategy, but there's some good info there. Note; I'm not promoting that option.  

As to your other question; there are no tax benefits per se if you have the leases in the name of the LLC. The LLC would file a Form 1065 with the gain/loss reported to you on a K1. I'm not a CPA.

Hope those were specific and helped...

banks wont lend to an llc. keep that in mind.

i was wondering if its ok to use an llc just for being anonymous.  use the llc as a management company.  tenants write check to llc. llc then pays you. but then what do you put on the lease?  your name or llc?  i wonder how that plays out if you need to go after someone.

I'm going through this right now. I'm looking at refinancing 2 properties I own under an LLC, but the banks want me to transfer the deeds to my personal name. This costs about $350/property to do. Not to mention I have to basically eat the LLC fee I paid for the year ($140 in Florida) since it's basically useless at that point. So that refi's will cost me at least $840 just in transfer fees.

In other words, if you're planning to refi at some point, then don't bother with the LLC.

@Deba Douglas - there is no right answer on this. If you go the personal name route make sure you get a large umbrella policy. I personally use LLCs and LPs for my portfolio and have a personal umbrella in case the "corporate veil" is pierced. Regarding financing, holding your properties in an LLC name is more difficult but not that difficult. The bank just makes you sign a personal guarantee which is what you'd be doing anyway if it was in your personal name. I have worked with several national lenders that allow LLC loans, don't require W2s or tax returns. Loans that are specifically designed for real estate investors.

Originally posted by @George V. :

banks wont lend to an llc. keep that in mind.

i was wondering if its ok to use an llc just for being anonymous.  use the llc as a management company.  tenants write check to llc. llc then pays you. but then what do you put on the lease?  your name or llc?  i wonder how that plays out if you need to go after someone.

"Anonymity" is a whole separate topic. Meander through the lengthy thread on this post for more info;

https://www.biggerpockets.com/forums/92/topics/244...

Not sure if you can legally use the LLC to serve as the PM in that capacity. The way I have it set up utilitzes a degree of separation; my property management company has a contract with my LLC for services provided. Tenant pays the PM which in turns pays my LLC rather than the tenant paying the LLC directly. Lease is legally between my PM and the tenant. Degree of separation...

Hope that helps.

Originally posted by @Salvatore Lentini :

@Deba Douglas - there is no right answer on this. If you go the personal name route make sure you get a large umbrella policy. I personally use LLCs and LPs for my portfolio and have a personal umbrella in case the "corporate veil" is pierced. Regarding financing, holding your properties in an LLC name is more difficult but not that difficult. The bank just makes you sign a personal guarantee which is what you'd be doing anyway if it was in your personal name. I have worked with several national lenders that allow LLC loans, don't require W2s or tax returns. Loans that are specifically designed for real estate investors.

which lenders have you used that allows loans to LLC? I've been searching but haven't found one yet. thanks!

Originally posted by @Jason L. :

I'm going through this right now. I'm looking at refinancing 2 properties I own under an LLC, but the banks want me to transfer the deeds to my personal name. This costs about $350/property to do. Not to mention I have to basically eat the LLC fee I paid for the year ($140 in Florida) since it's basically useless at that point. So that refi's will cost me at least $840 just in transfer fees.

In other words, if you're planning to refi at some point, then don't bother with the LLC.

 Actually, this isn't entirely accurate and probably depends on the state/county where the recording is being done. I've transferred my properties back and forth between my personal name and my LLCs; involving1031 Exchanges, refi's and outright selling of a property. Recording fee for Quitclaim transfer is $50.  

@Deba Douglas As you can imagine, there are a LOT of opinions on this. I went through this same thing after I bought my second property. Wanted to do everything I could to protect myself and my personal finances. I got with a lawyer (who is a real estate investor) and he worked with me on what would be best for my situation. I kept the residences in my personal name, set the business up as a property management/tenant service company. Set up separate business bank accounts, operating agreements, etc, I even pur it in the lease that i (personally) am not legally liable for anything related to the residence, the business is. They must initial it where that line is. I have personal liability insurance and I have a business liability insurance plan (as nothing is fail safe). I run the business as a business, I do not commingle funds and I don’t treat the business bank account like it is my personal checkbook. If you start mixing your finances, that when you really open yourself up for allowing a court to pierce the corporate veil. Good luck.
Originally posted by @Matthew McNeil :
Originally posted by @Jason L.:

I'm going through this right now. I'm looking at refinancing 2 properties I own under an LLC, but the banks want me to transfer the deeds to my personal name. This costs about $350/property to do. Not to mention I have to basically eat the LLC fee I paid for the year ($140 in Florida) since it's basically useless at that point. So that refi's will cost me at least $840 just in transfer fees.

In other words, if you're planning to refi at some point, then don't bother with the LLC.

 Actually, this isn't entirely accurate and probably depends on the state/county where the recording is being done. I've transferred my properties back and forth between my personal name and my LLCs; involving1031 Exchanges, refi's and outright selling of a property. Recording fee for Quitclaim transfer is $50.  

Who did you have to call to make that happen? I got quoted way more than that, but I have never done it before.

Originally posted by @Jason L. :
Originally posted by @Matthew McNeil:
Originally posted by @Jason L.:

I'm going through this right now. I'm looking at refinancing 2 properties I own under an LLC, but the banks want me to transfer the deeds to my personal name. This costs about $350/property to do. Not to mention I have to basically eat the LLC fee I paid for the year ($140 in Florida) since it's basically useless at that point. So that refi's will cost me at least $840 just in transfer fees.

In other words, if you're planning to refi at some point, then don't bother with the LLC.

 Actually, this isn't entirely accurate and probably depends on the state/county where the recording is being done. I've transferred my properties back and forth between my personal name and my LLCs; involving1031 Exchanges, refi's and outright selling of a property. Recording fee for Quitclaim transfer is $50.  

Who did you have to call to make that happen? I got quoted way more than that, but I have never done it before.

Your Title company can basically walk you through this including advising you whether to use a Warranty or Quitclaim Deed.  The Title companies I’ve used have a downloadable form on their website.  Fill it out, get it notarized, then record it at the county recorder’s office – usually the clerk of court.  Note; you’ll need the parcel # and legal description which you can easily find on the deed that was presented at closing.

Its possible the county will have certain fees such as Doc stamp fees, etc.  And, they may charge you a % based on the value of the asset. 

Finally; be sure to get permission from the lender to transfer the property to the LLC in order to make sure the "due on sale" clause isn't violated. And, confirm with Title company that the "Continuation of Insurance" clause isn't violated.

@Scott Titus I did something very similar, I had a quick question about your lease setup. Did you sign your own name on the lease as the landlord? What sections does it explicitly say that the lease is between your LLC and your tenant? Wondering if I should adjust mine at all. Thanks!

@Christian Nachtrieb My lease shows it in 3 spots, the first is in the beginning line/paragraph where it says who the lease is between. The second is on the second to the last page where the tenant has to initial several areas showing specifics regarding the property. The final is an agreement page between myself (the owner) and the business giving the business responsibility of the property for the duration of the lease, signed by me, my wife, and any additional party designated specifically by us in writing to represent the business (meaning a 3rd party if i am on vacation).

I am considering buying a Building all cash under and LLC with multiple partners (or Members in this case).

Curious how this will work on the tax side.

Since this is a pass through entity, we will receive K-1s.

Then we need to fill out Schedule E or Schedule C?

My understanding is that this is filed under Schedule E, not C.

If it were Schedule C, then we would also have to pay FICA, correct?

Originally posted by @Scott Titus :
@Christian Nachtrieb

My lease shows it in 3 spots, the first is in the beginning line/paragraph where it says who the lease is between. The second is on the second to the last page where the tenant has to initial several areas showing specifics regarding the property. The final is an agreement page between myself (the owner) and the business giving the business responsibility of the property for the duration of the lease, signed by me, my wife, and any additional party designated specifically by us in writing to represent the business (meaning a 3rd party if i am on vacation).

Sounds iron clad I love it! Thanks Scott, much appreciated.

Originally posted by @Llewelyn A. :

I am considering buying a Building all cash under and LLC with multiple partners (or Members in this case).

Curious how this will work on the tax side.

Since this is a pass through entity, we will receive K-1s.

Then we need to fill out Schedule E or Schedule C?

My understanding is that this is filed under Schedule E, not C.

If it were Schedule C, then we would also have to pay FICA, correct?

 All of my multi-member LLCs for my commercial assets are filed with a partnership return (1065) and the members receive a k-1.  That's it.  No personal SchE or C to file.  

Alas I am just a laymen and inevitably an accountant/CPA/EA will rip me one and tell you to see an accountant/CPA/EA with  no further information.  LOL

Originally posted by @Steve Vaughan :
Originally posted by @Llewelyn A.:

I am considering buying a Building all cash under and LLC with multiple partners (or Members in this case).

Curious how this will work on the tax side.

Since this is a pass through entity, we will receive K-1s.

Then we need to fill out Schedule E or Schedule C?

My understanding is that this is filed under Schedule E, not C.

If it were Schedule C, then we would also have to pay FICA, correct?

 All of my multi-member LLCs for my commercial assets are filed with a partnership return (1065) and the members receive a k-1.  That's it.  No personal SchE or C to file.  

Alas I am just a laymen and inevitably an accountant/CPA/EA will rip me one and tell you to see an accountant/CPA/EA with  no further information.  LOL

 Steve, rental income losses are reported on SCH E, which are then reported on your 1040 line 17.

Originally posted by @Llewelyn A. :

I am considering buying a Building all cash under and LLC with multiple partners (or Members in this case).

Curious how this will work on the tax side.

Since this is a pass through entity, we will receive K-1s.

Then we need to fill out Schedule E or Schedule C?

My understanding is that this is filed under Schedule E, not C.

If it were Schedule C, then we would also have to pay FICA, correct?

The LLC files a Form 1065. And, the IRS allows rental income losses to be reported on SCH E (page 2) which is then reported on Form 1040 line 17.  Generally, rental properties take losses for the first several years and the IRS allows you to claim those losses on your personal return.  No SCH C unless its a disregarded entity not filling out a 1065.  So, no FICA.  But you should confirm any advice you receive here on BP with your CPA. 

@Deba Douglas I won't get into the conversation if you should or shouldn't but if you're looking for a great attorney that's familiar with real estate in the DFW area I recommend Kellie Stokes at Stokes Law Office For my husband and I she has been worth every $.

@Deba Douglas Not a lawyer, nor CPA, your due dilligence required, but here is my 2¢:

The LLC gives you liability protection or litigation insurance, which complements regular insurance (which doesn't cover you in all scenarios and whatever limits). LLC is not a replacement for insurance, you still need that, and umbrella insurance, and is just another form of insurance. It's not an absolute answer, you'll still need to maintain the properties, be careful when leasing, hiring, bookkeeping, etc. It's not a guarantee you'll never be sued, but it minimizes the target on your back, makes it unappealing, difficult to collect (if losing) and provides compartmentalization (you'll not lose your other properties if one of them gets in trouble, the "damage" will be contained to that property at the max).

Depending on how you structure your entities for asset protection, you might get some tax advantages or additional benefits (like if you self manage and form an operations entity for property management, you might get auxiliary benefits from that, like being able to establish a Solo 401K plan), but generally speaking the LLC is a legal concept with no tax benefit.

Note: You don't want to hold real estate in an S-corp or C-corp. Also, if you transfer property with a Quit Claim Deed you'll lose title insurance.

There are other things coming into play with an LLC - financing and DOS, distribution per LLC (how many houses per LLC), insurance, maintaining the LLC, etc. Is like any other tool in your investing toolbox - you still need to learn how to use it properly, and how it works in conjunction with your other tools.

Here is a diagram to help you in your quest:

Deba, contrary to what another member posted; "... if you transfer property with a Quit Claim Deed you'll lose title insurance."  This is not correct - albeit with some clarification;

As with a trust, lenders do not exercise the "due on transfer/sale" clause when real property is transferred to the same individuals in an official capacity (i.e. Joe and Jane Smith as trustees of Smith Trust).  Typically, the same applies to LLCs where Joe and Jane are the sole members.

Title company actual wording - CONTINUATION OF INSURANCE: The coverage of this policy shall continue in force as of Date of Policy in favor of an Insured after acquisition of the Title by an Insured or after conveyance by an Insured, but only so long as the Insured retains an estate or interest in the Land, or holds an obligation secured by a purchase money Mortgage given by a purchaser from the Insured, or only so long as the Insured shall have liability by reason of warranties in any transfer or conveyance of the Title.

I've Quitclaimed many times between myself (and my wife) and our LLC which are in our names as the two sole members. The Title company confirms that the insurance is not lost - in this type of a transaction where we "retain" and interest in the property which we do because we own the LLC.

@Matthew McNeil The truth is in the middle - @Deba Douglas needs to check with her title company to make sure her title insurance is transferable and in what conditions. Usually, with a Quit Claim Deed you lose it, but yes, that depends on the insurer and policy.