Rental Property Ownership

This article discusses the types of entities for the ownership of rental properties. Below, you’ll see different types of entities have their advantages and disadvantages. However, the general aim is to limit liability and guard your property from any unsecured creditors.

Also seek the counsel of a CPA or an attorney prior to establishing an entity and transferring ownership of a rental property. Do note, this guide is not a comprehensive replacement for qualified council.

TIP: Seek the counsel of a certified public accountant or tax attorney before establishing an entity and transferring ownership of your rental property to it. This landlord tax guide is just not meant to be an all-in-one solution you should seek the attention of a qualified professional.

Individual Ownership

This form of ownership is the more 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, for one it does not require you to file any complicated paperwork or pay any heavy filing fees. The main disadvantage to this form of ownership is that your creditors could force a sale of the rental property if they can attain a court order against you, or compel you into involuntary bankruptcy.

Legal Entity Ownership

Corporations, general partnerships, and limited liability companies are all examples of legal companies. The differences between the entities are important and outlined below. The major advantage to entity ownership is that your personal creditors can’t force a sale of the rental property, since you do not own it. The only type of entity that does not require registration with the Secretary of State is the general partnership. With regards to taxes, the type of entity chosen does not matter a tremendous amount because in most cases, rental income “passes through” from the entity and is taxed on your personal tax return (but see the cautionary note under corporations). Read the article titled Necessary Tax Forms for Reporting Rental Activity, included in this tax guide for landlords, for further discussion on just how rental income is taxed.

General partnership. The partnership is an association of two or more people who carry on as co-owners of a for-profit business. Generally 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 most cases not recommended.

Limited partnership. A limited partnership is more complex considering the fact that this method of ownership requires at least one general partner and one limited partner. The limited partner will not be personally liable for any debts of the partnership, but then again has no management rights. Now the general partner has sole management rights, and also personal liability for any debts that may result from the partnership. This arrangement is also generally not recommended.

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. Meaning that you are not personally liable for the debts of the entity, that is, unless the catalyst was your own wrongdoing. This form of ownership is often preferable because it will reduce liability and presents with fewer formalities than those of the corporation.

Corporations. This mode of ownership gives you limited liability and allows for perpetual existence. Although they also require the maintenance of specified formalities for you to maintain this limited liability guard. So for this reason that LLCs or LLPs are often times more suiting to your aims. Also worth mentioning 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-corp pays dividends. And it is more desirable to side-step the double-taxation trap whenever it is possible.

Seattle Tax CPA +John Huddleston is a graduate of both the UW and WSU. He has written many tax related articles over the years, and has spoken about tax issues on the radio.