Yo what's going on everybody? My name is Ryan, I'm a CPA, and today I'm going to be talking
about whether or not you should put rental property or real estate under an LLC. But
first I would love it if you would smash the like button, and if you're new here please
consider subscribing to my channel. That would be awesome and of course leave any concerns,
comments, or insults in the comments section below alright. So today we're going to be talking about
putting rental property or real estate into LLCs. And you know, what are the tax benefits of that?
What are the asset protection benefits? And what are the risks? Okay so let's start with the tax
benefits. So whether you own a property under your sole, your own personal name, or under an LLC
there's no real tax advantage, there's not much of a tax difference okay. It's really just you know,
how you legally report it. But tax-wise, the deductions are virtually the same.
If you're a single member LLC, which means that you're the sole owner of an LLC,
there's not even a difference in the way that you file your taxes.
Now if you are partnering with somebody as a multi-member LLC to own a rental property
that's where the tax difference is going to change a little bit. So when you are part of
a partnership you have to file a partnership tax return before you file your personal tax return
and that's where things are different. But there's again not much more tax benefits to doing it that
way, it's just a legal thing more or less. What about an S-Corp? I get questions all the time
should I put my rental property into an S-Corp? And the short answer is, no you shouldn't. Any
property that you intend to hold on to for a while, like long-term property rentals,
Airbnb's you plan on hanging onto for a while, you should not put under an S-Corp.
The only time you should S-Corp any like kind of real estate transactions are if you're doing fix
and flips. Or any short term kind of thing where you hang, where you're buying it for a short term,
selling it you know, not too long later. And the reason is because of this thing called a step-up
basis. Now when you hold property, like rental property or real estate, if you hold on to it and
then you pass away, whoever inherits your property will get a step-up in basis. I'm not going to go
into too much detail on that but that's, that's a pretty big tax advantage okay. It's going to save
your inherited, your heirs, you know, thousands of dollars, maybe hundreds of thousands of dollars
depending on how much the property has appreciated in value. Now if you put it under an S-Corp you
don't see that step-up in basis anymore and that's why we don't really recommend putting rental
properties or long-term investment properties into S-Corps. Just a normal LLC will do just fine.
There's no tax differences because rental properties or long-term investments are taxed as
a passive income. And S-Corps you know, passive incomes won't won't see any tax differences
either. Usually when people say you should S-Corp your business it's to avoid self-employment tax,
while rental properties do not incur self-employment tax that means that there's no tax
differences between the two. Also, putting your rental properties into an S-Corp will complicate
things more because owners of S-Corporations are required to pay themselves a salary.
So eventually you're going to have to pay yourself a W-2 salary out of your S-Corp
just to stay compliant, and it's just really totally unnecessary. Now what about asset
protection purposes? Now this is where the the lawyers and the legal team come in for you.
When you have a property owned by yourself personally, you are personally liable for
anything that happens. So let's say you have a tenant that is you know, coming home drunk and
you might have like a crack in the sidewalk or something. She's drunk, she trips over
the sidewalk, she could sue you for personal injury. Ideally you have insurance in place
but either way, you are personally at risk. Now if you have your rental property under your LLC
and the same scenario happens, she can only sue the LLC okay. And the only assets the LLC has are
the property itself and maybe a little money from the rental income. Whereas you over here,
you might have your own personal residence, you have savings, retirement, all that stuff that
is protected from any, from any lawsuits from your rental property. Now simply putting your
rental property into an LLC does not mean that it's protected. You have to take extra steps,
like you have to make sure you have an operating agreement. You've got to make sure you operate
it from a you know, proper checking account, like the LLC's checking account, any rental income and
expenses have to be going through that checking account. So extra steps you've got to make sure
that you take to make sure you're fully protected. I can't stress this enough, you have to talk to an
attorney to get the operating agreement drafted. Don't go to a Legal Zoom or something like that,
make sure it's properly drafted. This is not something you want to mess around with
because it could cost you a lot of money in the end if you don't do it properly up front all
right. So what are the risks of doing it this way? Well in order to talk about that I need to tell
you how you can actually put your rental property into an LLC. So there's two primary ways to do it,
one is to you know purchase the property under your LLC from the get go, get financing for under
the LLC. That's a little more challenging. And the second way is to purchase the property personally,
and then once the closing is done, then you quit claim deed it into your LLC. And now your LLC owns
the property. Now that is not the ideal way to do it and I'll tell you why in a second.
But first, in order to purchase the property under your LLC from the get-go you first need to
identify a property, and then set up an LLC for the property. You know a lot of people just use
like the street address of the property and then LLC at the end, and then you've got to you know,
get a operating agreement set up from your attorney, checking account opened,
and then the lender has to see if your business, your LLC has any business history. And
guess what, it does not because you just opened it. And then it has, and then the lender has
to see if your business has any credit history. And again, it does not since you just opened it.
So the lender is going to ask for a personal guarantee from you as the owner. So the lender's
going to check your credit, your income, all that stuff. And then after all that, they might
lend you some money to purchase this property for your LLC okay. That's the cleanest way to do it.
The most ideal way to do it. Now the second way I mentioned is to purchase the property personally
and then quit claim deed it into your LLC. And while this is much easier because you have all
the credit history, you have the income, you might be more likely to qualify more easily for lending,
quit claiming the deed over to your LLC will do something that's a little risky. Because
you're financing it under your own name, if you quit claim to deed it to your LLC, that means
technically the lender doesn't have a collateral under you anymore okay. So if the lender ever
finds out, they can just call your loan due, and you have to pay it all right at once.
And while this is actually a real risk, I've never seen this happen or heard of it happening from any
of my clients or anybody that I know. So just keep that in mind. It's a real risk but I've never seen
it happen. And of course, if you don't need to finance the property, if you can just pay cash
for it then this is all a moot point anyway. So again, if you can get your property under the LLC
from the get go, cleanly purchase it that way, then that's the ideal way to go. If you can't,
maybe purchase it personally, quit claim deed it over to your LLC, and hope that your lender
never finds out. That is the second way to go. And of course, if you inherited property
that was already under an LLC, then that's you know, that's, that is what it is. So
that's all I've got for today. Hope that was helpful. Definitely reach out to me if you have
any questions in the comments below. And again, if you're new here please consider subscribing
to my channel I'd really appreciate that. And also, if you found this video helpful smash or
caress the like button that would be awesome. All right, have a good one. Take care and stay safe.