Should I put Single Family LTR in LLC

Question

Hi!

I have a property in Denver that I'm renting out long term.  I got a letter from my mortgage company that said I can move the title into an LLC if I like without triggering the due at sale clause.

This is the only property I own in Colorado and am curious what advantages I will have by putting it in an LLC outside of limiting my liability.  If anyone is versed on tax benefits or implications I'd be interested in hearing that as well.

Please let me know your thoughts.

Thank you,

Stuart Udis · Answer

In most municipalities you will still be required to pay transfer taxes equal to the properties assessed value even if the property is transferred for a nominal amount plus deed prep and recording fees. Most focus solely on due on sale clause as the deciding factor. The biggest issue I observe amongst real estate investors is the inability to articulate the reasons why they should transfer properties or simply own properties from day 1 in an LLC. There are certainly benefits to owning properties in an LLC, perhaps more so for some investors than others. My recommendation is to start by truly understanding what owning your properties in an LLC will do for you before spending money on entity formation and the subsequent transactional costs. I say this because many investors have inaccurate understandings of how entities, namely LLC's work and protections they offer.

Ashish Acharya · Answer

Moving your rental property into an LLC offers limited liability protection, shielding personal assets from legal claims. However, there are no additional tax benefits, as rental income would still pass through to your personal return. Consider the administrative costs of maintaining an LLC before proceeding.

*This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Sean Graham · Answer

It can potentially help with asset protection by having a separate entity, but it doesn’t help from a tax perspective.

Austin Cheatham · Answer

@Jason Malabute is correct here. Typically we do not see any direct tax advantages of putting a rental into an LLC. LLC is mainly about liability protection. From a tax perspective only, putting your property into an LLC may cause your tax preparation bill to go up due to new filing requirements for a single member LLC. Some states also require an annual license fee to own and operate an LLC so that could also cause a potential for increased costs there as well.I would consult with a real estate attorney to see if an LLC makes sense from a legal standpoint and advise your accountant as to your decision so the appropriate tax filings can be made.

Jason Malabute · Answer

From a tax perspective, there typically isn’t a significant advantage. As a single-member LLC, the IRS considers it a disregarded entity, meaning the income, expenses, and other tax-related items will still be reported on your personal tax return via Schedule E. So, it won’t offer you any tax savings on its own.

However, one of the primary reasons real estate investors place property into an LLC is for liability protection. If something were to happen with the property, such as a lawsuit from a tenant, having it in an LLC can help protect your personal assets from being at risk.

Account Closed · Answer

Hey Elliott, From a tax perspective, placing a rental property into an LLC generally doesn't offer significant tax advantages, as a single-member LLC is considered a disregarded entity by the IRS, meaning income and expenses are still reported on your personal tax return via Schedule E. However, the main benefit of using an LLC is liability protection, shielding personal assets from lawsuits related to the property. It's important to note that forming an LLC may increase costs due to additional filing requirements and potential state fees.

Elliott Beckstrom · Answer

Thank you all for the input! I have a Real Estate Attorney advising me on it now and I think from a liability perspective it makes sense to have the LLC.  I really appreciate all of the thoughtful responses!

John Mason · Answer

Moving it to LLC helps get a Business Line Of Credit which is a great tool to scale up

Koren Lavi · Answer

Agreed about consulting with a real estate attorney. I’m not an attorney but when I’ve researched it, moving title to an LLC, but still having you personally as the mortgagor might not offer considerable protection. An individual could name both the LLC and you in a lawsuit.

Should I put Single Family LTR in LLC

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