Benefits of Creating a Real Estate Company for Rental Properties
Building a real estate holding company such as an LLC (limited liability company) is worth considering if you want to take advantage of tax perks and add to your current real estate holdings’ value. As with most investing strategies, there are many benefits to this option.
However, since LLC regulation is at the state level, creating one will call for a process that varies according to state. But the following benefits are common to all:
Controlled Personal Liability
When a lawsuit is filed against you over a property you own as an individual, every personal asset you have will be at risk. But if you form an LLC, only LLC-owned assets will be at stake. In short, only your rental property can be jeopardized and not your personal finances.
Keeping Rental Properties Separate
Just as you draw a line your business assets from your personal assets, so should your rental properties be independent of one another. If you own several properties, you can even set up a different LLC for each property for added protection. If a lawsuit is filed over any of them, all the others will be spared.
Businesses possessed by individuals enjoy what is known as pass-through taxation. Corporations are usually taxed directly on their profits, and owners are taxed again on the income they make from their businesses. With an LLC, your company’s income will “pass through” to you as the owner. Essentially, any money you make from your LLC rental property will land straight on your individual income tax return, thereby minimizing the total sum deducted from your income for taxes.
Convenient Separation of Business and Personal Costs
When you set up an LLC, you should open a new bank account dedicated to it. This way, it will be more convenient marking your personal expenses from your business costs. This also makes claiming business expenses a lot less complicated at tax time. As you look at your bank statements, you will clearly see which expenses were incurred for business or personal reasons.
When to Create an LLC
One thing you may be unsure of is whether you should form an LLC once you’ve bought a rental property or even before. It will actually work both ways, but there are benefits to doing it prior to the property purchase, such as not having to pay Title Transfer Tax, not having to update rental leases once the transfer is completed, and more.
If you decide to create an LLC first, the property can be bought in the LLC’s ownership (it will be your LLC’s name on the deed). Otherwise, you’ll have to transfer the property deed to the LLC.