Advantages of Forming a Real Estate Company for Rental Property Investing
If you want to avail of tax advantages and raise the value of your current real estate holdings, you may consider forming a real estate holding company, such as an LLC (limited liability company). 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 true for all are the benefits stated below:
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 if you form an LLC, only LLC-owned assets will be at stake. In other words, your personal finances will be safe and only your rental property will be jeopardized.
Separation of Rental Properties
Aside from keeping your business assets from your personal assets, you should also separate your rental properties from one another. If you have lots of properties, you can protect them by forming an LLC for each one. Should a lawsuit be filed involving one of them, the others will stay intact and unaffected.
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
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 will also simplify the tax of claiming businesses expenses during tax time. When you check your bank statements, it will be instantly clear which expenses are personal and which are business.
When to Form an LLC
A common question is whether the LLC must be set up before purchasing a rental property or after. 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.