Rental Property Ownership

This article will look at the types of entities for rental property ownership. As outlined below, different types of entities have their advantages and disadvantages. However, the aim in each case is to limit your liability and safety-guard your property from any unsecured creditors.

Also consult with a certified public accountant or an attorney prior to establishing an entity and transferring ownership of a rental property. Do note, this guide isn’t a reasonable alternative for expert council.

Note: This rental property tax guide will not serve to replace the competent council of a certified public accountant or tax attorney. You should seek qualified professional counsel when establishing an entity and transferring ownership of a rental property.

Individual Ownership

This is the more common and the most straight forward form of ownership and occurs when you purchase a rental property in your name. This includes owning the property with your spouse, or as joint tenants or tenants in common with someone else. The main benefit is that this is simple, straightforward, and doesn’t require the filing of any complicated paperwork or filing fees. The key disadvantage to this type of ownership is that your creditors could force a sale of the rental property if they receive a mandate against you, or compel you into an involuntary bankruptcy.

Legal Entity Ownership

Legal entities include limited partnerships, general partnerships, limited liability companies, and corporations. We’ll look at the difference in a bit. Now let’s look at the leading benefit of entity ownership, and that would be that with entity ownership your personal creditors can’t force a sale of a rental property. The only entity type that doesn’t require registration with the secretary of state is a general partnership. Regarding taxes, the entity type does not matter that much because in most cases rental income “passes through” from the entity and is taxed on your personal tax return, See the article titled “Necessary Tax Forms for Reporting Rental Activity,” which is included in the Landlord Tax Guide for more on this.

General partnership.

This form of ownership takes place when two or more persons co-own a for profit business. With this general partnership the partners have equal management privileges, however each partner is personally liable for the debts of the partnership. And thus a general partnership is most often not preferred.

Limited partnership. This entity is more complex than a general partnership because it requires at least one limited partner and one general partner. The general partner has sole management rights, coupled with personal liability for any resulting debts. Whereas, the limited partner is not personally liable for debts of the partnership and also is without management rights.

Limited liability partnership or limited liability company. A limited liability partnership and a limited liability company are similar forms of entity selection. Both of them provide limited liability to the partners and members. This would mean that you are not personally liable for the entity’s debts, that is, unless the catalyst is your own wrongdoing. This form of ownership is often superior because it lessens liability and presents with fewer formalities than those of the corporation.

Corporations. This mode of ownership gives you limited liability and also allows for perpetual existence. Although they also require the maintenance of exact formalities for you to maintain this limited liability guard. It is for this reason that LLPs or LLCs are generally more suiting to your goals. Also worth making note is that corporations are categorized as either c-corp or s-corp. When a corporate entity is taxed as a c-corporation, then it pays tax on rental income, and then you’ll pay tax (again) when the corporation pays dividends. And it is more desirable to avoid the double-taxation trap whenever it is possible.

Auburn Accountant +John Huddleston holds multiple degrees from the University of Washington. For years he has written many articles on tax related topics.