My husband and I are in the process of buying a rental property-- single story family home in Albuquerque, NM. Is it advisable to make it an LLC? Any other comments are appreciated. As always thank you for your help, Marion
You have a typo in the subejct.
Contact a CPA or tax preparer for the state you live in. Also research on the web for difference between S corp and LLC. An LLC passes all its income to its shareholders, and all of the income is subject to self-employment tax, whereas in an S corp only the salary portion is. Also, be sure ak your CPA about Schedule E. If you have a loss from rental activity, you may not be able to deduct all or part of it, so be aware.
An LLC does not necessarily pass all of its income to its shareholders. An LLC is free to choose how it wishes to be taxed, and should it choose to be treated as a C-Corp, only compensation and/or dividends would be taxed on the personal return. If an LLC chooses S-Corp status, there is the possibility that some of the income can pass through without being treated as self-employment income. If it chooses to be treated as a sole-proprietorship/partnership then income from business operations will be self-employment income.
However, in this case we're talking about a rental property, so all of the above is somewhat irrelevant. The reason for considering an LLC is to protect other assets should something go wrong with the rental property. The legal rationale has no impact on the tax decision. And since this is a rental property, passie loss limitation rules will apply.
Ira Smilovitz
Having rental property is hard enough without overcomplicating it. If you're just going to have this property, don't worry about an LLC or other. You need liability insurance however. Oftentimes your homeowner's insurance will allow protection for up to four units.
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It may be a good idea but there are several considerations. First of all, if you are getting a mortgage the lender will probably want the property in your own, personal name, not the LLC.
If you have an LLC, you will probably have to pay some fees to establish it.
If it is not a single member LLC you will have to file a Form 1065, partnership return or file an election to file otherwise.
Your state may be different, but in my state, you must file a state return even if you are a single member LLC or your LLC status will be terminated. In my state, there is no personal income tax, but there is a tax somewhat similar to an income tax on LLCs and corporations.
You should consult a CPA before deciding. You will then probably need to get an attorney to prepare the forms to establish the LLC.
If the OP's primary concern is protection against potential liabilities for something -- anything -- connected with the rental ("LL" is "limited liability", nicht wahr?), might an alternative option be to invest a comparable amount in a hefty "umbrella liability" policy? (which might provide them some added liability protection in other aspects of their life as well?)
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