LLC for rental property?

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jeninhrco
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LLC for rental property?

Post by jeninhrco » Wed Apr 04, 2018 10:37 am

My father in law has invested for years in dental office buildings and received the rent from them. Hubby and I have the opportunity to buy one of the buildings now.

Do most people who own rental property form an LLC? If not, are there other practical steps to take to limit liability? I'm talking with a lawyer soon and trying to figure out which questions to ask.

I understand some aspects. It looks like LLCs bring the limited personal liability but also a lot of paperwork. Some non-experts have told me that the rental income could just pass through to us if we're the only members of the LLC, but then books I read say we have to keep the paperwork and banking separate, and maybe even pay SE taxes.

Would love input from those who have been down this road, or those who have chosen not to have an LLC and the reasons for that choice.

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Sammy_M
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Re: LLC for rental property?

Post by Sammy_M » Wed Apr 04, 2018 11:56 am

jeninhrco wrote:
Wed Apr 04, 2018 10:37 am
Do most people who own rental property form an LLC? If not, are there other practical steps to take to limit liability? I'm talking with a lawyer soon and trying to figure out which questions to ask.
Get a good liability insurance policy regardless of whether you form a legal entity, and make sure the tenant does as well, naming you as additional insured.
jeninhrco wrote:
Wed Apr 04, 2018 10:37 am
I understand some aspects. It looks like LLCs bring the limited personal liability but also a lot of paperwork.

Some non-experts have told me that the rental income could just pass through to us if we're the only members of the LLC, but then books I read say we have to keep the paperwork and banking separate, and maybe even pay SE taxes.
The paperwork is not that difficult.

You can do a single member LLC, which is disregarded or tax purposes. You file Schedule E on personal taxes, and will pay self-employment tax, same as if no entity formed.

You definitely want to setup a separate checking and book-keeping system. Otherwise, my understanding is a claimant would have much greater odds of 'piercing the veil' and pursuing you personally.

ResearchMed
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Re: LLC for rental property?

Post by ResearchMed » Wed Apr 04, 2018 12:36 pm

jeninhrco wrote:
Wed Apr 04, 2018 10:37 am
My father in law has invested for years in dental office buildings and received the rent from them. Hubby and I have the opportunity to buy one of the buildings now.

Do most people who own rental property form an LLC? If not, are there other practical steps to take to limit liability? I'm talking with a lawyer soon and trying to figure out which questions to ask.

I understand some aspects. It looks like LLCs bring the limited personal liability but also a lot of paperwork. Some non-experts have told me that the rental income could just pass through to us if we're the only members of the LLC, but then books I read say we have to keep the paperwork and banking separate, and maybe even pay SE taxes.

Would love input from those who have been down this road, or those who have chosen not to have an LLC and the reasons for that choice.
One tricky detail that might moot the regular advantage of an LLC (liability) is that IF you need to get a mortgage in your personal names, then the LLC will not help much, if at all, in terms of liability. You personally are linked.
IF you can get a mortgage in the name of the LLC, this isn't a problem, but most brand new LLC's can't get a mortgage.
If you pay cash, this isn't a problem.

We had a mortgage on rental properties in our personal names, but still used an LLC for most documents and advertising.
But this was really just to give the appearance that there was no personal liability.
We never had any sort of claim against us, fortunately.

And we had HIGH commercial umbrella insurance for the rental properties, separate from our personal umbrella coverage.

RM
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jeninhrco
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Re: LLC for rental property?

Post by jeninhrco » Wed Apr 04, 2018 1:26 pm

Sammy_M wrote:
Wed Apr 04, 2018 11:56 am

You can do a single member LLC, which is disregarded or tax purposes. You file Schedule E on personal taxes, and will pay self-employment tax, same as if no entity formed.

You definitely want to setup a separate checking and book-keeping system. Otherwise, my understanding is a claimant would have much greater odds of 'piercing the veil' and pursuing you personally.
Thanks. If our only income from the property is rental income, do we still pay SE tax? I didn't realize/had not heard that landlords pay SE tax on rental income.

Thanks for the tip about book-keeping!

jeninhrco
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Re: LLC for rental property?

Post by jeninhrco » Wed Apr 04, 2018 1:28 pm

ResearchMed wrote:
Wed Apr 04, 2018 12:36 pm

One tricky detail that might moot the regular advantage of an LLC (liability) is that IF you need to get a mortgage in your personal names, then the LLC will not help much, if at all, in terms of liability. You personally are linked.
IF you can get a mortgage in the name of the LLC, this isn't a problem, but most brand new LLC's can't get a mortgage.
If you pay cash, this isn't a problem.

We had a mortgage on rental properties in our personal names, but still used an LLC for most documents and advertising.
But this was really just to give the appearance that there was no personal liability.
We never had any sort of claim against us, fortunately.

And we had HIGH commercial umbrella insurance for the rental properties, separate from our personal umbrella coverage.

RM
Thanks RM. We will be paying cash, so fortunately no mortgage issues.

We'll look into commercial umbrella coverage, too. Did you like the company you used? (I don't know whether mentioning it by name is allowed...)

ResearchMed
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Re: LLC for rental property?

Post by ResearchMed » Wed Apr 04, 2018 1:53 pm

jeninhrco wrote:
Wed Apr 04, 2018 1:28 pm
ResearchMed wrote:
Wed Apr 04, 2018 12:36 pm

One tricky detail that might moot the regular advantage of an LLC (liability) is that IF you need to get a mortgage in your personal names, then the LLC will not help much, if at all, in terms of liability. You personally are linked.
IF you can get a mortgage in the name of the LLC, this isn't a problem, but most brand new LLC's can't get a mortgage.
If you pay cash, this isn't a problem.

We had a mortgage on rental properties in our personal names, but still used an LLC for most documents and advertising.
But this was really just to give the appearance that there was no personal liability.
We never had any sort of claim against us, fortunately.

And we had HIGH commercial umbrella insurance for the rental properties, separate from our personal umbrella coverage.

RM
Thanks RM. We will be paying cash, so fortunately no mortgage issues.

We'll look into commercial umbrella coverage, too. Did you like the company you used? (I don't know whether mentioning it by name is allowed...)
Which insurers can offer different types of coverage varies from state to state.

Our rentals were in a different state from our residence, and our own insurer didn't write policies in the other state.
So we had to find a new 'regular' insurer, and got the umbrella coverage through them too.
We just got a lot more coverage for the rental, as we couldn't be there all the time, to notice if a porch stair got loose or such.
Umbrella coverage is pretty inexpensive, and it was well worth the peace of mind.
Never had a claim, fortunately.

RM
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Hulu
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Re: LLC for rental property?

Post by Hulu » Wed Apr 04, 2018 1:55 pm

Absolutely. Liability is a big risk and it's relatively inexpensive for what it saves you. You are wise/fortunate to buy in a way that you can LLC from the start. In FL, there are fees to change title when you have a mortgage.

I'd second umbrella insurance as well. It's cheap because the chances are low. But also because there are ways out of it for insurance companies. Like making sure all work is licensed and insured. And provide all disclosures required. It's mostly common sense however a lot of people take short cuts that expose themselves unnecessarily to risk.

ResearchMed
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Re: LLC for rental property?

Post by ResearchMed » Wed Apr 04, 2018 2:00 pm

Also, since you really *can* "use" the LLC protections (without that pesky personal mortgage), make CERTAIN that you do not commingle ANY monies from the rental with your personal funds.

Keep totally separate accounts, don't charge "a chair for the rental" with your personal charge card, etc.
Chances are you wouldn't need that protection, but there's no point in having a full-fledged LLC if you don't work within the requirements to keep the protections.

RM
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jeninhrco
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Re: LLC for rental property?

Post by jeninhrco » Wed Apr 04, 2018 3:02 pm

ResearchMed wrote:
Wed Apr 04, 2018 2:00 pm
Also, since you really *can* "use" the LLC protections (without that pesky personal mortgage), make CERTAIN that you do not commingle ANY monies from the rental with your personal funds.

Keep totally separate accounts, don't charge "a chair for the rental" with your personal charge card, etc.
Chances are you wouldn't need that protection, but there's no point in having a full-fledged LLC if you don't work within the requirements to keep the protections.

RM
Did you, then, write yourself checks from the LLC at times? This might sound like a silly question... I will follow up with an in-person appointment with the lawyer, but he listed three big NO's in our phone call: commit fraud, commingle accounts, or do something really egregious - the example he gave was draining the bank account every month. Which made me think, oh, then we shouldn't consider this investment income in our regular budget?

And now I am confused. Our aim wouldn't be to grow a business, but to have an extra source of income... Just wondering if anyone has information on this.

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Sandtrap
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Re: LLC for rental property?

Post by Sandtrap » Wed Apr 04, 2018 3:07 pm

You can own 500 rental units without an LLC. You're doing business as a sole proprietor. Just be sure you have the needed insurance, etc, etc.

mahalo,
j :D

ResearchMed
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Re: LLC for rental property?

Post by ResearchMed » Wed Apr 04, 2018 3:08 pm

jeninhrco wrote:
Wed Apr 04, 2018 3:02 pm
ResearchMed wrote:
Wed Apr 04, 2018 2:00 pm
Also, since you really *can* "use" the LLC protections (without that pesky personal mortgage), make CERTAIN that you do not commingle ANY monies from the rental with your personal funds.

Keep totally separate accounts, don't charge "a chair for the rental" with your personal charge card, etc.
Chances are you wouldn't need that protection, but there's no point in having a full-fledged LLC if you don't work within the requirements to keep the protections.

RM
Did you, then, write yourself checks from the LLC at times? This might sound like a silly question... I will follow up with an in-person appointment with the lawyer, but he listed three big NO's in our phone call: commit fraud, commingle accounts, or do something really egregious - the example he gave was draining the bank account every month. Which made me think, oh, then we shouldn't consider this investment income in our regular budget?

And now I am confused. Our aim wouldn't be to grow a business, but to have an extra source of income... Just wondering if anyone has information on this.
I'm not sure what your attorney meant by "don't drain the bank account".

Keep in mind, we didn't have to be as strict, because we didn't have the true protection (due to the personal mortgages).
So IF we happened to charge something on our personal card, we weren't putting LLC protection at jeopardy, etc.

You perhaps should speak with an accountant about how to handle any annual profits, and which tax schedule form you'd use.

RM
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ResearchMed
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Re: LLC for rental property?

Post by ResearchMed » Wed Apr 04, 2018 3:11 pm

Sandtrap wrote:
Wed Apr 04, 2018 3:07 pm
You can own 500 rental units without an LLC. You're doing business as a sole proprietor. Just be sure you have the needed insurance, etc, etc.

mahalo,
j :D
I'd still recommend the LLC for liability protection (of personal assets) should something "bad" occur and someone sue you.

I'd still have the good insurance, including umbrella, as you'd want the insurer to handle any defense, etc.

RM
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ChrisC
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Re: LLC for rental property?

Post by ChrisC » Wed Apr 04, 2018 3:17 pm

I have a three member LLC whose major asset is a 4-family apartment residental bldg, with an annual rent roll of $100K. There were several reasons for us to create the LLC besides the liability shield it provides. I'll focus soley on the liability shield and operational aspect of our LLC to provide you with some guidance. We also have a $2 million commercial insurance policy which covers liability, hazard, worker's compensation, and loss of rental income risks. Our bldg is a pre-War World I structure in a highly desirable NYC neigborhood though the land is proably worth more than the bldg. None of the members take a salary or other compensation for services we might perform on behalf of the LLC -- this makes it very simple. Total cost for creating the LLC was around $2K in NY State in 2010, most of which entailed peculiar publication requirements -- though for us we didn't need any legal services because I'm lawyer with some experience in this area and drafted the basic operating agreement and made all the requisite legal filings. I have a retired CPA friend who prepares our Federal and State income tax filings for the LLC, at a dirt cheap fee given to me because of our friendship and past trades of favors between us. I'm pretty sure the cost of her services would be $1000-1500.

For the first several years, after substantial renovation work in one of our units, we reported accounting and tax losses (though we really had real tangible income) on paper. The last few years we have had significant real income but modest accounting and tax income. Tax income or losses pass thru to members on K-1s, who then report that on their personal income taxes. Our members have not taken any distributions (the equivalent of corporate dividends) but distributions are not taxable and considered a return of capital -- it decreases the capital accounts that each member has in the LLC. Tax and accounting income (which isn't distributed later) adds to the capital accounts of the members.

renue74
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Re: LLC for rental property?

Post by renue74 » Wed Apr 04, 2018 3:18 pm

Even LLC members can take monthly draws. It all passes through to your personal income taxes anyways.

I have several residential rental properties and attempted to set up an LLC in the beginning, but I would do cash out refi's and no bank would loan the LLC money. So, I gave up and hold all property in personal names.

I have a $3M personal umbrella policy and each rental property, I must contact Geico and add to my policy. I think I pay about $450/year for the policy, but they also require you to max out your personal home and auto policies before they will give you an umbrella policy.

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Sandtrap
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Re: LLC for rental property?

Post by Sandtrap » Wed Apr 04, 2018 3:26 pm

ResearchMed wrote:
Wed Apr 04, 2018 3:11 pm
Sandtrap wrote:
Wed Apr 04, 2018 3:07 pm
You can own 500 rental units without an LLC. You're doing business as a sole proprietor. Just be sure you have the needed insurance, etc, etc.

mahalo,
j :D
I'd still recommend the LLC for liability protection (of personal assets) should something "bad" occur and someone sue you.

I'd still have the good insurance, including umbrella, as you'd want the insurer to handle any defense, etc.

RM
Yes. Absolutely true.
There are many ways to set things up. I have quite a few business folk with very substantial assets with LLC's and without, and also with other setups.
As for liability protection even with an LLC, in today's litigious climate, the "deeper pockets" are prime targets.
Of course, umbrella insurance should be more than adequate.

aloha,
j

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Sammy_M
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Re: LLC for rental property?

Post by Sammy_M » Thu Apr 05, 2018 6:05 am

jeninhrco wrote:
Wed Apr 04, 2018 1:26 pm
Sammy_M wrote:
Wed Apr 04, 2018 11:56 am

You can do a single member LLC, which is disregarded or tax purposes. You file Schedule E on personal taxes, and will pay self-employment tax, same as if no entity formed.

You definitely want to setup a separate checking and book-keeping system. Otherwise, my understanding is a claimant would have much greater odds of 'piercing the veil' and pursuing you personally.
Thanks. If our only income from the property is rental income, do we still pay SE tax? I didn't realize/had not heard that landlords pay SE tax on rental income.

Thanks for the tip about book-keeping!
Yes, SE tax is due, even on sole proprietorships. It is automatically calculated if you plug your info into Turbo Tax, etc.
ResearchMed wrote:don't charge "a chair for the rental" with your personal charge card, etc.
The bigger issue is using business funds for personal use. Owners and employees often use personal funds for the business purposes; they just submit reimbursement requests with proper documentation.
One tricky detail that might moot the regular advantage of an LLC (liability) is that IF you need to get a mortgage in your personal names, then the LLC will not help much, if at all, in terms of liability. You personally are linked.
The lender will have recourse against you personally. However, even if you are personally on the note, the LLC may likely offer benefit if there is a tenant suit, provided the deed is in the name of the LLC and you have handled LLC matters separately from personal matters.
Last edited by Sammy_M on Thu Apr 05, 2018 6:14 am, edited 1 time in total.

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Sammy_M
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Re: LLC for rental property?

Post by Sammy_M » Thu Apr 05, 2018 6:09 am

jeninhrco wrote:
Wed Apr 04, 2018 3:02 pm
I will follow up with an in-person appointment with the lawyer, but he listed three big NO's in our phone call: commit fraud, commingle accounts, or do something really egregious - the example he gave was draining the bank account every month. Which made me think, oh, then we shouldn't consider this investment income in our regular budget?

And now I am confused. Our aim wouldn't be to grow a business, but to have an extra source of income... Just wondering if anyone has information on this.
Please let us know what your lawyer says. However, it my understanding that a good way to handle distributions is to pay a consistent quarterly or monthly distribution from the business (LLC) to its owners (members). You can increase or decrease the level of distribution based on business performance, but don't automatically drain it every month.

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Sammy_M
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Re: LLC for rental property?

Post by Sammy_M » Thu Apr 05, 2018 6:20 am

Sandtrap wrote:
Wed Apr 04, 2018 3:26 pm
Yes. Absolutely true.
There are many ways to set things up. I have quite a few business folk with very substantial assets with LLC's and without, and also with other setups.
As for liability protection even with an LLC, in today's litigious climate, the "deeper pockets" are prime targets.
Of course, umbrella insurance should be more than adequate.
Would you be willing to share more about the other setups?

On your last comment, I would only point out that liability insurance usually contains some exclusions, e.g. mold, lead paint, asbestos.

ChrisC
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Re: LLC for rental property?

Post by ChrisC » Thu Apr 05, 2018 7:38 am

Sammy_M wrote:
Thu Apr 05, 2018 6:05 am

Yes, SE tax is due, even on sole proprietorships. It is automatically calculated if you plug your info into Turbo Tax, etc.
This might be true for single member LLCs. It is not true for multi-member LLCs unless the members actually take a salary for services performed or actively manage the LLC's operations. If the rental income is not distributed to LLC members, one runs into the issue of phantom income -- income reported on the LLC return and K-1, but not actually received by the members and taxed as income on the member's personal 1040 return. I've never paid any SE taxes on my phantom income. I don't know what the rule would be for a two member LLC, as evidently proposed by the OP, for rental property. But I can't imagine the OP paying SE taxes on pass thru rental income, if the OP hires property managers for the rental and the income is truly passive rental income. This link appears to be helpful on this issue.https://www.nolo.com/legal-encyclopedia ... 29675.html

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Sandtrap
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Re: LLC for rental property?

Post by Sandtrap » Thu Apr 05, 2018 10:05 am

Sammy_M wrote:
Thu Apr 05, 2018 6:20 am
Sandtrap wrote:
Wed Apr 04, 2018 3:26 pm
Yes. Absolutely true.
There are many ways to set things up. I have quite a few business folk with very substantial assets with LLC's and without, and also with other setups.
As for liability protection even with an LLC, in today's litigious climate, the "deeper pockets" are prime targets.
Of course, umbrella insurance should be more than adequate.
Would you be willing to share more about the other setups?

On your last comment, I would only point out that liability insurance usually contains some exclusions, e.g. mold, lead paint, asbestos.
Good question. . . For legal counsel and OP's CPA depending on each person's finances, and personal and business circumstances and needs.

As you likely already know. The basics are:
Sole Proprietorship, Partnership (In Hawaii, AKA a "Hui" of many dif. forms), Corporation, S Corporations, and Limited Liability Company (LLC), all with variations within each.

In my experience, these are the basics. I'm just a retired businessman amongst financial genius' here.
Also, protection against litigation is a whole 'nuther' deep Can-Of-Worms for landlords.
aloha
j :D

ralph124cf
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Re: LLC for rental property?

Post by ralph124cf » Thu Apr 05, 2018 4:15 pm

ChrisC wrote:
Thu Apr 05, 2018 7:38 am
Sammy_M wrote:
Thu Apr 05, 2018 6:05 am

Yes, SE tax is due, even on sole proprietorships. It is automatically calculated if you plug your info into Turbo Tax, etc.
This might be true for single member LLCs. It is not true for multi-member LLCs unless the members actually take a salary for services performed or actively manage the LLC's operations. If the rental income is not distributed to LLC members, one runs into the issue of phantom income -- income reported on the LLC return and K-1, but not actually received by the members and taxed as income on the member's personal 1040 return. I've never paid any SE taxes on my phantom income. I don't know what the rule would be for a two member LLC, as evidently proposed by the OP, for rental property. But I can't imagine the OP paying SE taxes on pass thru rental income, if the OP hires property managers for the rental and the income is truly passive rental income. This link appears to be helpful on this issue.https://www.nolo.com/legal-encyclopedia ... 29675.html
Note that this is not a sole proprietorship business. This is schedule E income, which is considered passive income. It is not subject to FICA taxes, unlike employment income, including Self Employment income.

Ralph

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