Rental Property Ownership

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

Also consult with an attorney or a certified public accountant prior to establishing an entity and transferring ownership of a rental property. This is not a comprehensive replacement for expert council.

Note: This landlord tax guide wont serve to replace the expert council of a CPA 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 more popular method of taking ownership. This is when you purchase a rental property in your own name. A significant disadvantage of this type of ownership is that your creditors are able to force a sale of the rental property if they receive court mandate, or they could potentially compel you into involuntary bankruptcy. A main plus to this form of ownership is that the process is simple, without heavy filing fees or complex forms.

Legal Entity Ownership

Corporations, general partnerships, and limited liability companies are all examples of legal companies. The differences between these entities are important and outlined below. The main advantage to entity ownership is that your personal creditors are not able to force a sale of the rental property, since you don’t own it. The only type of entity that does not require registration with the Secretary of State is the general partnership. As far as taxes are concerned, the entity type chosen doesn’t matter a whole lot because in most cases, rental income “passes through” from the entity and is taxed on a personal tax return (but do note the cautionary note under corporations). See the article entitled Necessary Tax Forms for Reporting Rental Activity, included in this Guide, for more details on just how rental income is taxed.

General partnership. The 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 has equal management rights, but is personally liable for the debts of this partnership. And regarding that liability, a general partnership is in general not recommended.

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

Limited liability partnership/company (LLPs or LLCs). A limited liability partnership and a limited liability company are quite similar entities, both providing for limited liability to partners/members. This would mean that you will not be personally liable for the debts of the entity, except in cases when the debt is a result of your own wrongdoing. This kind of ownership is often preferable because of limited liability plus there are not as many formalities which require observance than with corporations.

Corporations. This type of ownership provides limited liability and allows for perpetual existence. Although they also require the upholding of special formalities in order to maintain this limited liability guard. Therefore for this reason that LLPs or LLCs are commonly more suiting to your aims. Also worth making note is that corporations have the distinction of being either s-corporation or c-corporation. When a corporate entity is taxed as a c-corporation, it will pay tax on rental income, and then you’ll pay tax (again) when the corporation pays dividends. And it’s best to avoid the double-taxation trap when you are able to.

Tax Accountant is an authority on tax and accounting and has written several articles on these topics. He is a graduate of Washington State University and the University of Washington.

Kirkland CPAAbout Kirkland CPA
Kirkland CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

Speak Your Mind

Tell us what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!

  • Huddleston Tax Accountants / Huddleston Tax CPAs – Kirkland
    Certified Public Accountants Focused on Small Business
    11335 NE 122nd Way, Suite 105 Kirkland, WA 98034

    Huddleston Tax CPAs & accountants provide tax preparation, tax planning, business coaching,
    QuickBooks consulting, bookkeeping, payroll, and business valuation services for small business.

    We serve: Seattle, Bellevue, Woodinville, Redmond, Sammamish, Bothell, and areas throughout WA.
    We have a few meeting locations. Call to meet John C. Huddleston, J.D., LL.M., CPA, Lance Hulbert, CPA, Grace Lee-Choi, CPA, Jennifer Zhou, CPA, or Jessica Chisholm, CPA. Member WSCPA.