Form LLC company for rental home investment?
Question: I am looking at acquiring a rental home this year and another one next year. I am also wondering if I should form an LLC company to help protect myself from liabilities. Some examples are:
- Occupants visitors slip on tile in backyard swimming pool and break leg
- I myself have a minor car accident and lawyers find out I own multiple rental properties
- Nosey employer (mine) wonders why my name is directly listed to multiple homes in area
- I get sued by anyone
etc
Ultimately, over the next few years, I plan to have 3 to 5 rental homes in my possession.
Your thoughts/opinions wanted please
Answer: I am appalled at the lack of sophistication of the resplies to this thread. However good may be the advisors that some of you have, you obviously are not being given the basis for those professionals’ judgment. (And I don’t even live in the USA, and can give a better reply.)
You need to weigh two different issues: personal liability (the one you mentioned) and tax advantage. Sometimes the two go hand-in-hand, sometimes not.
A few thoughts, without however exhausting the issues (after all, you are not paying me):
1. Bear in mind that you may want to minimize capital gains and/or death taxes. The first (IRC sec 121 tax-free sale up to $250K or $500K (or more, under the latest regs, if the house is owned by more than 2 occupiers who’ve lived there the requisite time) may be lost if the property is titled in a manner not allowed by the law (a co-op or condo is OK). Similarly, homestead protection may be lost; and the benefits of those 19 states that have tenancy by the entireties for married couples.
2. Use of a Family Limited Partnership, LLC, LLP or trust arrangement can yield valuation discounts for estate and gift taxation, and perhaps for capital gains tax too.
3. Use of a disregarded entity (single-member LLC: virtually all states allow them) will help with respect to liability matters. But it won’t save the property if you file bankruptcy. (One of the entitites in paragraph 2 might be of some help there.) What you need is lots of liability insurance to protect you, and perhaps an umbrella policy for yourself.
4. The big issue with corporations, S or C, or an LLC taxed as a corporation, is double taxation of gain: inside gain (a C corporation pays income and gains tax) and outside: when you dissolve or sell the corporation, you pay tax on your gain on its shares. Even a hybrid entity (one taxed as a partnership or disregarded entity in the USA but taxed as a corporation in the foreign country — Canada, the UK, and most other countries other than Switzerland) will have that problem with respect to the foreign tax authorities. (But not all countries tax gains on land within their borders when the owner is nonresident. Most do, but Britain does not, unless the owner has a permanent establishment and/or is deemed to be trading there. Virtually all countries do tax rents; so tax treaty provisions are important. You don’t need to know this in your case, but I added it to make my answer complete.)
5. Another issue is the consolidation of profits, gains and losses and (in the USA) the convoluted Passive Activity rules and — more and more important over time — the Alternative Minimum Tax.
Sadly, few small investors can afford the accounting, tax and legal advice they really need. Anybody who tells you right off the bat that “LLC is best” might be right — but if s/he is it will be purely by accident. In some states, LLCs are said to be expensive to run.
There’s one last point worth mentioning: use of a C corporation (as managing agent, perhaps with separate LLC as owner, or you can own the property yourself) can allow you to hive off income as salary. And if you’re really successful and you decide to spend your days and nights in the Caribbean, then you can probably get a $80,000 foreign earned income exclusion. And if there’s a social security totalization agreement or the corporation is not incorporated in the USA, then there’s no FICA to pay.
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