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). 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 if you form an LLC, only LLC-owned assets will be at stake. To put it simply, only your rental property suffers and your personal finances will be spared.
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.
Businesses possessed by individuals enjoy what is known as pass-through taxation. Typically, corporations will be taxed on the profits they make, while individuals will again be taxed on their business-generated income. If you’ve set up an LLC, the money made by your company just “passes through” to you, 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.
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 make it easier for you to separate your personal costs from your business costs. 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 Form an LLC
One thing you may be unsure of is whether you should form an LLC once you’ve bought a rental property or even before. You can actually do it either way, but if you set up the LLC before property purchase, you will be able to avoid such disadvantages as paying a Title Transfer Tax, updating rental leases following the transfer, etc.
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.