Ownership of Rental Properties

This article will look at the various types of entities for the ownership of rental properties. Below, you’ll see that different types of entities have their respective pluses and minuses. However, the goal in each case is to limit liability and guard your rental property from unsecured creditors.

When forming an entity, you will have to go to Legal Entity Registration to complete the registration.

Note: This guide will not serve to replace the competent council of a Seattle Accountant or attorney. You should seek qualified professional counsel when establishing an entity and shifting ownership of a rental property.

Individual Ownership

This is the simpler and most popular method of taking ownership. This is when you purchase a property in your own name. The leading disadvantage of this form of ownership is that your creditors may be able to force a sale of the rental property if they receive a court order, or they might compel you into involuntary bankruptcy. A big advantage of this form of ownership is that the process is simple, without heavy filing fees or complex forms.

Legal Entity Ownership

Legal entities include limited partnerships, general partnerships, limited liability companies, and corporations. Let’s look at the difference a bit later. First let’s look at the major advantage of entity ownership, that being with entity ownership your personal creditors can’t force a sale of a rental property. The only entity type that does not require registration with the secretary of state is the general partnership. Regarding taxes, you’ll see the entity type doesn’t matter that much because in most cases rental income 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. A partnership is an association of two or more people who carry on as co-owners of a for-profit business. In a general partnership, each partner has equal management rights, and are personally liable for the debts of this partnership. And regarding that liability, a general partnership is in general not ideal.

Limited partnership. This entity is more complex than the general partnership as it requires both one limited partner and one general partner. The general partner has sole management rights, as well as personal liability for any resulting debts. Whereas, the limited partner is not personally liable for debts of the partnership and furthermore is without management rights. This entity selection is generally not recommended.

Limited liability partnership/company. A limited liability partnership and a limited liability company are pretty similar entity types, both provide for limited liability to the partners/members. This means you will not be personally liable for the entity’s debts, that is unless the debt is a result of your own wrongdoing. This kind of ownership is usually preferable because of limited liability plus there are fewer formalities that require observance than with corporations.

Corporations. This mode of ownership gives you limited liability and allows for perpetual existence. Although this selection of ownership requires the upholding of specified formalities in order to maintain this limited liability status. Thus for this reason that LLCs and LLPs are generally more suitable to your purposes. Also worthy of noting is that corporations are categorized as either s-corporation or c-corporation. When a corporate entity is taxed as a c-corporation, then 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 side-step the double-taxation trap when you are able to.

Seattle CPA is a graduate of Washington State University and the University of Washington. He has written many articles in the tax realm over the years.

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