A limited liability company is a business structure made up of members, which might include individuals or companies. An LLC can have one member or hundreds. Each state has its own regulations for LLCs, so the Internal Revenue Service recommends that you check with state law when considering or starting this type of company. If you own a rental home, starting an LLC and transferring the property title to the company has the benefit of protecting you from liability, but you need to be prepared for the drawbacks as well.
The best reason to form an LLC when renting out a house is to protect your personal finances and assets from any liability that goes with your rental property. If a tenant or a tenant's guest gets hurt at your property and files a lawsuit, you could be held liable if you own the property personally. Also, if a creditor is pursuing you and your assets, the property owned by an LLC would not be subject to any liens or claims.
There are no tax advantages to be gained by forming an LLC, but there also are not any tax disadvantages. When you are the only member of your LLC, you will not have to file a separate tax return. The IRS will allow you to file as a sole proprietor. If there are two or more members in your LLC, the income earned through the property is passed through to the owners, meaning the members or owners of the LLC will simply need to declare it on their own income taxes.
When it comes time to pass properties onto your heirs, having the rental home in an LLC will make the process smoother. Instead of transferring deeds and working through trusts and wills, the existing LLC can simply add as members the heirs who stand to inherit the property. The transition will be less complex if the property is managed through an LLC.
Most residential lenders will not approve a mortgage to an LLC. You will have to take out a home loan as an individual and then transfer the title to the LLC before you rent it out. If you decide to refinance your loan, you will need to transfer the property back out of the LLC and into your individual name in order to get refinanced. Then, you will have to transfer it to the LLC again. This can mean a lot of paperwork as well as additional charges and fees.
As the individual owner of a property, you purchase title insurance to protect yourself against any claims of ownership made by others on your property. Most mortgage companies require this insurance as a condition of closing. When you transfer the title of your rental home to an LLC, the title insurance will probably not transfer with it. Find out if you can get an endorsement from the title insurance company to cover your property when it moves to the LLC.
- Hemera Technologies/AbleStock.com/Getty Images