If you own rental or other income-producing property, you should consider putting it into a limited liability company, an LLC. This can be a great way to protect your assets, while at the same time you can reap some great tax advantages!
Let’s say that someone slips and falls on your rental property and sues you. If you own the property as an individual, all your assets like your home, investments, savings accounts, etc….would be at a great risk.But if the property is owned by an LLC, in most cases the risk would be limited to the amount of your investment in the LLC. Your personal assets would be safe.
The great thing about LLCs is that they offer the asset protection of a corporation while at the same time giving you much more tax flexibility. For example, if you’re the sole owner of an LLC, you can generally choose to be taxed as though it were a sole proprietorship. This means that income and capital gains from the LLC will pass through directly to you and you’ll pay taxes as an individual. There’s no separate tax on the LLC, so you’ll avoid double taxation . If your LLC has more than one member it can choose to be taxed as a partnership. Again, the income and capital gains will pass through directly to the members. Going one step further, an LLC can also choose to be taxed as an S or a C corporation, if it meets the other requirements for these kinds of corporations. Many people use S corporations to reduce self-employment, Social Security and Medicare taxes. An additional benefit of an LLC is that you can often reduce estate taxes by forming one and then giving your children a certain number of shares in it each year.
If you own more than one rental property, you might want to put each property into a separate LLC. That way, if there’s a problem with one property, your liability will be limited to your interest in that property, and you can protect your interest in the other properties.
It’s possible to set up an LLC on your own but remember not all benefits of an LLC are available in all states. Best bet is to consult with an attorney to make sure you’re getting all the asset-protection and tax advantages that are available to you!