Why You Should Consider Starting a Real Estate Company for Rentals
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. Like most investing strategies, this option offers many advantages.
However, LLC’s are regulated by state so the process of starting one will be unique from one state to another. But the following benefits are common to all:
Controlled Personal Liability
If someone sues you over a property that you own as an individual, then every one of your personal assets will be at stake. But with an LLC, only those assets owned by the LLC are affected. In other words, your personal finances will be safe and only your rental property will be jeopardized.
Separation of Rental Properties
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 have lots of properties, you can protect them by forming an LLC for each one. If a lawsuit is filed over any of them, all the others will be spared.
Pass-through taxation is a benefit enjoyed by individually owned businesses. In most cases, businesses are taxed based on the profits they make, while business owners are again taxed according to their earnings from those businesses. With an LLC, your company’s income will “pass through” to you as the owner. So any income generated by your LLC (your rental property) will fall under your individual income tax return, hence reducing the total amount removed from your income for taxes.
Convenient Separation of Business and Personal Costs
If creating an LLC, it’s best to open a new bank account for it. This will allow you to separate your personal from your business expenses. This way, claiming business expenses also becomes easier during tax season. When you check your bank statements, it will be instantly clear which expenses are personal and which are business.
When to Set Up an LLC
One question you may have is whether you should create an LLC before or after buying a rental property. It’s possible either way, but you’ll probably want to create the LLC prior to buying the property to avoid potential headaches such as updating rental leases after the transfer, paying a Title Transfer Tax, your mortgage holder closing the loan (which means closing costs for you) and issuing you a new loan with a higher interest rate, and so on.
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). If you already own the property, the deed must be transferred to the LLC.