Rental Property Ownership

Let’s start by taking a look at the various entity selection types that are available. Each has pluses and minuses. As a rule of thumb, you’ll aim to protect your property from unsecured creditors and limit liability. So let’s lay out the list and see what we’ve got…

When establishing an entity, you will have to visit Entity Registration Forms to register.

Note: This guide will not serve to replace the expert council of a CPA or attorney. You should seek qualified professional help when establishing an entity and transferring ownership of a rental property.

Individual Ownership

This is the most common and the most straight forward method of ownership and occurs when you purchase a rental property in your own name. This includes owning the property with your spouse, or as joint tenants or tenants in common with someone else. The big benefit is that this is simple, straightforward, and does not require you to file any complicated paperwork or pay any lofty filing fees. The key disadvantage to this form of ownership is that your creditors could force a sale of the rental property if they attain a mandate against you, or compel you into involuntary bankruptcy.

Legal Entity Ownership

Legal entities include limited liability companies, corporations, general partnerships, and limited partnerships. We’ll look at the difference in a bit. Now how about a look at the leading appeal of entity ownership, that being with entity ownership your personal creditors cannot 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, you’ll see the entity type does not matter that much because in most cases rental income is taxed on your personal tax return, or “passes through”, See the article titled “Necessary Tax Forms for Reporting Rental Activity,” which is included in the Landlord Tax Guide.

General partnership. A partnership is an association of two or more people to carry on as co-owners of a for-profit business. In a general partnership, each partner will have equal management rights, and are personally liable for the debts of this partnership. Thus, a general partnership is ordinarily not ideal.

Limited partnership. A limited partnership is more challenging due to the fact that this method of ownership involves one limited partner and at least one general partner. The limited partner will not be personally liable for the debts resulting from the partnership, but also has no management rights. Now the general partner has sole management rights, coupled with personal liability for the debts of the partnership. This arrangement is also usually not recommended.

Limited liability partnership/company. A limited liability partnership and a limited liability company are very similar entities, both provide for limited liability to partners/members. This means that you will not be personally liable for the debts of the entity, unless the debt stems from your own wrongdoing. This form of ownership usually is preferable because of limited liability and additionally there are fewer formalities to observe than with corporations.

Corporations. This manner of ownership offers you limited liability and also allows for perpetual existence. Although this selection of ownership requires the upholding of particular formalities so as to maintain this limited liability guard. So for this reason that LLCs or LLPs are often times more suitable for your aims. Also worthy of noting is that corporations are categorized as either s-corp or c-corp. When a corporation is taxed as a c-corp, it pays tax on rental income, and then you will pay tax (again) when the c-corporation pays dividends. And it is more desirable to avoid the double-taxation trap.

Tax Accountant +John Huddleston has written extensively about accounting and tax issues. He holds a Juris Doctorate and a Masters in Tax Law from the University of Washington School of Law.