Benefits of Creating a Real Estate Company for Rental Properties
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 you are sued over a property you possess as an individual, all your personal assets will be on the line. 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.
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 multiple properties, you can protect them individually with a separate LLC for each. If a lawsuit is filed over any of them, all the others will be spared.
Pass-through taxation is a benefit reserved for businesses owned by individuals. 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. Basically, whatever income was made by your LLC – your rental property – will go straight to your individual income tax return, decreasing the sum taken from your income for taxation.
Easy Separation of Your Business and Personal Expenses
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 also makes claiming business expenses a lot less complicated at tax time. When checking your bank statements, you will automatically see which expenses were spent for business or personal needs.
When to Set Up 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 choose to form an LLC beforehand, you can buy the property as an LLC, and what appears on the deed will be the name of your LLC. If not, you need to transfer the deed under LLC’s name.