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What Entity Is The Best To Place Rental Properties In?

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What Entity Is The Best To Place Rental Properties In?

Postby Hardwin » Sun Oct 08, 2017 6:02 am

This is a serious legal question with possibly significant consequences.
As such, it should be directed to an attorney who understands tax law.

There are two parts to the choice you are considering.
First, liability for acts or accidents on the property could lead to claims against the owner of the property.
Second, Federal, and possibly state, taxes are payable on income earned by the recipient.

Corporations, including limited liability companies, afford some degree of insulation of the ultimate owner from liability claims made against the property, typically by tenants or visitors to the property.
Only the assets of the entity holding the property can be accessed by a lawsuit directed at a corporation owning a property.
If the corporation owns all the properties that an individual invests in, then he could lose them all to a single lawsuit.
The corporation would be well served to be covered by liability insurance, just like an individual owner would do via an extension of his homeowners insurance or a blanket or umbrella policy.

A word of warning, though, operating as if the corporation were your personal playground can allow the court to pierce the corporate veil and go after the individual stockholder instead of stopping at the corporation.

Subchapter S has an additional advantage over LLC alone or a C corporation, in that taxes flow through to the individual without additional corporate level taxes.

Federal taxes, or at least returns, are due from each level of ownership.
If an LLC owns a single property and a C owns all the LLCs, then every LLC files and the C files tax returns.
Both Federal and state taxes are often collected from every entity, plus corporation charges, not related to income, are payable every year.
Usually the Secretary of State where you live will collect those corporate fees and the state tax department gets its cut, too, while Uncle Sam is looking for a chunk also.

Partnerships do not place a veil between the named partnership and the individuals.
Any liability claims would flow through to the partners.
Something one partner did wrong would be paid for by all, if the erring partner could not come up with the funds.

A variant called a limited partnership will shield the limited partners from claims, but not the general partner, who typically carries on business for the limited partners and is covered by insurance.
The general partner's compensation is normally much higher than the limited partners and they have no say in how things are run (usually).

The partnership files returns but typically no taxes.

Sub S corporations are fairly easy to set up and cheap and some accountants like LLCs for the underlying corporate entity, plus the sub S tax flow-through can reduce overall taxes.

If operated properly to maintain separation of the corporation from the individuals, sub S is very attractive.
However, you will have a problem if your partners are not filing joint tax returns with you, since it is limited to "family" business.

Which is best?

It depends.

If you're just starting out, it may be cheaper to get additional liability cover and consider other forms of legal structure when more than a single property is at stake.
Isolating properties from each other is suggested when a partnership is used for taxation.
While the LLC that holds an individual property still files returns, the liability can't cross over.

Have a nice long chat with an accountant who understands the liability aspect, or an attorney who understands the tax aspects.
You'll be happier knowing from an expert.
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What Entity Is The Best To Place Rental Properties In?

Postby Choncey » Wed Oct 11, 2017 10:19 am

Rent To Own Home - http://RentToOwnHome.uzaev.com/?apCM
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Joined: Fri Jan 03, 2014 10:58 am

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