Ownership of Rental Properties

This article discusses the types of entities for the ownership of rental properties. You’ll see below different types of entities have their disadvantages and advantages. Regardless, the aim in each case is to limit liability and guard your rental property from any unsecured creditors.

TIP: To establish one of the entities presented below, the applicable registration form and fee will have to be submitted with the Washington Secretary of State’s office. Access the forms at: SOS.WA.GOV.

TIP: Always consult with a CPA or tax attorney before establishing an entity and transferring ownership of your rental property to it. This landlord tax guide isn’t meant to be an all-in-one solution you should seek the care of a qualified professional.

Individual Ownership

This is the most common and simplest form of ownership and occurs when you purchase the 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 main benefit is that this is straightforward and simple, and does not require you to file 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 can 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 take a look at the differences in a bit. Now let’s look at the leading benefit of entity ownership, that being with entity ownership your personal creditors can’t force a sale of the rental property. The only entity type that doesn’t 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 “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 business for profit. Now with a general partnership each partner has equal management privileges, but also each partner is personally liable for the debts of this partnership. And thereby a general partnership is most often not preferred.

Limited partnership. This entity is more complex than a general partnership as it requires both one limited partner and one general partner. The general partner has sole management rights, and also personal liability for any debts. Whereas, the limited partner is not personally liable for debts of the partnership and at the same time has no management rights.

Limited liability partnerships (LLPs) or limited liability company (LLCs).A limited liability partnership and a limited liability company are similar forms of entity selection. Both of them provide limited liability to the members/partners. This means that you are not personally liable for the entity’s debts, that is, unless the catalyst was your own wrongdoing. This form of ownership is often preferable as it reduces liability and reveals fewer formalities than those of the corporation.

Corporations. Corporations permit perpetual existence and limited liability. But as a negative, they require the observance of rigid formalities in order to sustain the limited liability guard. In the absence of these formalities, a court mandate may “pierce the corporate veil” and hold you personally liable. For this reason, LLCs and LLPs are often more desirable for your purposes. Furthermore, for the purpose of taxation, corporations are split into “S” corporations and “C” corporations. If the corporation is taxed as a “C” corporation, it will pay tax on rental income, and then you will pay tax yet again when the corp pays out dividends. And you should avoid this “double taxation” snare.

Accountant is a prolific writer on the topics of accounting and tax issues. He holds a Juris Doctorate and a masters in Tax Law from the University of Washington.

Seattle CPAsAbout Seattle CPAs
CPA for Dentists+John Huddleston has written extensively on tax related subjects of interest to small business owners. Since 2002, he has been the owner of Huddleston Tax CPAs. He is a graduate of Washington State University and the University of Washington School of Law.

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