Rental Property Ownership

Let’s begin by looking at the different entity selection types available. Each has advantages and disadvantages. As a rule of thumb, you’ll look to protect your property from unsecured creditors and limit your liability. So let’s lay out the list and see what we’ve got.

Also seek the counsel of an attorney or a CPA prior to transferring the ownership of a rental property and establishing an entity. This guide isn’t a comprehensive replacement for specialized council.

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

Individual Ownership

This is the most common and the most straight forward form of ownership and occurs when you purchase a 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 pay any lofty filing fees. The principal disadvantage to this type of ownership is that your creditors could possibly force a sale of the rental property if they receive a mandate against you, or compel you into an involuntary bankruptcy.

Legal Entity Ownership

General partnerships, limited liability companies, and corporations are all legal entities. The differences between these entities are important and outlined below. The main advantage to entity ownership is that your personal creditors cannot force a sale of the rental property, because you don’t own it. The general partnership is the only type of entity that does not require registration with the Secretary of State. With regards to taxes, the type of entity chosen doesn’t matter very much because in most cases, rental income “passes through” from the entity and is taxed on a personal tax return (but do note the cautionary note under corporations). Cover the article entitled Necessary Tax Forms for Reporting Rental Activity, included in this Guide, for further discussion on just how rental income is taxed.

General partnership. This form of ownership takes place when two or more persons co-own a business for profit. Now with a general partnership the partners have equal management privileges, but also each partner is personally liable for the debts of this partnership. And thereby a general partnership is usually not preferred.

Limited partnership. This entity is more complex than the general partnership as it requires both one limited partner and a general partner. The general partner has sole management rights, along with personal liability for any resultant debts. While, the limited partner isn’t personally liable for debts of the partnership and at the same time has no management rights.

Limited liability partnership/company (LLPs or LLCs). A limited liability partnership and a limited liability company are very similar entity types, both providing for limited liability to partners/members. This means you are not personally liable for the debts of the entity, unless the debt is caused by your own wrongdoing. This kind of ownership is often preferable because of limited liability and there are fewer formalities to observe than with corporations.

Corporations. This mode of ownership offers you limited liability and also allows for perpetual existence. Although they also require the observance of certain formalities so as to maintain this limited liability status. Thus for this reason that LLCs and LLPs are generally more suitable to your aims. Also worth mentioning is that corporations fall under one of two categorizations: s-corp or c-corp. When a corporate entity is taxed as a c-corporation, it will pay tax on rental income, and then you’ll pay tax (again) when the c-corp pays dividends. And it’s preferable to side-step the double-taxation trap whenever it is possible.

Bothell Accountant +John Huddleston holds a masters degree in tax law and a juris doctorate from the University of Washington. He has written many tax related articles over the years.