Rental Property LLC Tax Benefits - Pros & Cons of using an LLC for real estate

welcome back in this video i'm answering the question should i put my rental property or real estate into an llc i'll be looking at rental property llc tax benefits and implications and looking at the pros and cons of using an llc for your real estate or rental property but first if you're new here my name's amanda and you're watching the business finance coach where i simplify all the technicalities of money and business and investing to help you succeed because i truly believe that the world needs your business and you deserve to make your dreams and ideas come to life and these aspects of our civilized society should not hold you back they should empower you to move forward and on that note i have a free crash course for you all about real estate and how to master your accounting and taxes and it includes a free template so after you finish this video if you need this foundational education and real estate be sure to get free access right now while this crash course is free for you check out the links or in the description below now let's jump into should you form an llc for your real estate or rental property and what are the pros and cons to using an llc for a rental so first the question is should i put a rental property real estate into an llc and i actually find that more often than not people are asking this question because you want to know about the tax benefits you know if you take these extra steps for an llc what are the tax benefits so first of all there's no right or wrong way here you can use an llc you cannot use an llc okay i just want to be clear about that it's not like one is far better than the other there are pros and cons and so that's what we're covering in this video number two there's no difference in taxes okay there's zero difference in tax whether you use an llc or you do not this is a big area where people mistake differences in process and requirements for differences in taxes so next before we get into the pros and cons of llc or not llc another fundamental concept to just be aware of is that when we talk about putting a rental property or real estate into an llc we're looking at the same foundational concepts as considering a business using an llc or not because renting a property or using it for business is what the irs calls trade or business and as long as profit motive is there it applies just the same now of course the pros and cons i'm going to go over are specific to rental properties but i just want you to understand that it's a business activity renting a property and so when if you see anything out there about choosing an llc or understanding llc's it applies to rental properties the same way and you might say but what if i'm renting a property and i have a loss well you still own the property because the payments of rent are going into your principle right and so the activity itself is is for profit you're not doing it for charity so with that let's get started into the pros and cons and this is really the meat of understanding your options with using an llc so a pro is that an llc is what's called a separate business entity it's formed under state legal law and what that means having a separate business the whole point of separate business is this concept called limited liability you might have heard of it it's hard to talk about the llc and not hear about limited liability because it's the primary feature of separate businesses so what is limited liability it's that you as an owner personally aren't responsible for what happens in the llc instead the llc is just like you are responsible for your actions if you break the law you can be sued you can be fined well now the llc has an activity renting a real estate property and it's responsible for its actions it can be sued it can be fined and therefore there's separation between what's owned in the llc and what you own personally and so it's a called protection to keep these liabilities separate so let's take a look at my cheat sheet from my choosing the best type of business to form course and a few other courses i have about entities so every business has legal and tax implications or sides and so you can see legal is on the left and tax is on the other side so every business has these two sides to it now if you see over on your left side it says is this business a separate entity or not the first option the sole proprietor isn't separate so if you personally go out and purchase a home and start renting it you have a for profit activity that you're doing it's just under you personally with all of the other types below including llc there's a separate entity created now on the tax side you can see that it's almost the same except for the single member llc when the llc was created it was what's called a disregarded entity on the tax side meaning the irs just never looks at it doesn't acknowledge it whoever owns the llc is who the irs sees and so the single member llc you can see it has a nickname called the best of both worlds because with our not separate business sole proprietor on the tax side on the right you can see it says separate business tax return and so the not separate business doesn't have to file a business tax return all of the other types of businesses do and that's a bad thing because they're more complicated they're more expensive more goes into it so it's considered a a you know more work not no benefit to it remember there's no tax benefit to using one of these entities it's just extra steps so the single member llc is called the best of both worlds because we get the limited liability on the legal side but we don't have to file a separate business return on the tax side now a multi-member llc does have to file a separate business return and that's a lot more cumbersome and so it's really something to consider if you're considering you know doing a multi-member llc because you think that's what you need to do be sure to understand that there's no tax benefit you want to really have a strategic reason why you would do a multi-member llc with other people you don't want to just be getting your daughter or getting your spouse to do it with you because you know you thought that that gives you a more legitimate business or tax benefits it's quite the opposite okay so nothing wrong with using the multi-member llc but you want to know why you're doing it you know you're going in with an investor you're doing the work the investors putting the money this is how you guys are combining as owners you just want to be clear about that otherwise this limited liability concept that's the pro of using an llc that really is the reason to do it but how relevant is this if people go around and like i said at the start there's no right or wrong here people use the llc people don't use the llc well if this limited liability is so so important and such a benefit why wouldn't i say everyone should use an llc well quite frankly if it it does create a lot more steps using the llc um for some people this is overwhelming and and prevents you from moving forward and of course i'm gonna go into the cons in a moment so i'll save um some aspects on that side but ultimately limited liability might never come into play might never even matter in the time that you have the business so that's or the rental property as an llc business so that's something to consider and also we have what's called insurance so you know using insurance is a good way to you know address liability issues so the main idea is that if you own 10 rental properties and you own them all personally then they are all part of your net value if you set up a single member llc for each individual rental property then if one of your tenants says oh landlord is so rich and such an a-hole and i tripped and hurt my arm so i'm going to sue because i know that he'll he or she owns all these homes and i want to get me some if they now sue the idea is that they can only go after the value that's in the llc now the llc could be if found at fault could be required to pay you know over time if they owe more than the value of the business they could you know be dedicating future earnings to this person if they win now the idea with an llc is you just close the business which of course you can't do personally when it comes to taxes these 10 rental properties that you have 10 llc's for they are all on your personal return the same way they would be if you didn't have the llc's so that's that double benefit you get the limited liability you don't have to file 10 business tax returns as long as you use the single member llc which means one owner now how often does that actually happen that's something i've tried to look into i certainly don't hear about these things happening all that much and so i do think it's kind of preparing for maybe a less common situation but that's also something for you know really you to decide based on your own intuition and i'll talk more about that at the end now let's jump into the cons so once you have an llc like we showed on my cheat sheet that's a separate business entity and therefore it needs to act separate from you as the owner this means that you don't co-mingle money what that means is that your rental property needs to have its own bank accounts and its own credit card accounts and primarily use those now this can be a pro right because it's nice and convenient to have everything separate but for some people this is a little bit challenging for them to do keeping finances separate means that the rental property llc business bank account and credit card doesn't pay your personal expenses and you personally don't pay for the rental property llc's expenses and if you do you're timely reimbursed from the llc another con is making sure that the rental property is actually owned by the llc if you're getting a mortgage or financing then that financer has to be willing to put the llc as the owner of the property and not you personally then the other consideration because remember i said everything is about this ownership is that you want your tenants to pay the llc and not you personally now if the property is owned by you personally you could then rent the property to the llc but this is a lot more work so just to recap the big pro of using an llc for your rental property or real estate is to use a single member llc so that you have limited liability if someone sues they only have access to that one real estate property that's in an llc and that's really the biggest strategy is to put one property in one single member llc because it's all about this limited liability on the con side although you might consider this still a benefit you have to then keep each llc as a fully separate entity separate bank accounts and then have all the activity related to that rental property under that bank account or credit card account keeping the finances separate all based on that ownership the other concern of course the con is that ownership aspect and being able to make sure that the real estate is owned by the llc and that all activity is actually under the llc and not you personally in closing i want to tell you about a free master your accounting and taxes crash course that i have specifically for you about real estate this crash course goes through all the foundational questions that everyone asks me about real estate and includes a free spreadsheet template that you can use to do your accounting and keep track of the basics i answer all the common questions hiring bookkeepers software what you need to keep track of how to save taxes doing a like kind exchange and all of those foundational pieces to real estate so do check out the link it'll be up here or down here and join me over at my website small business school and get free access to this free crash course on everything you need to know about accounting in taxes for real estate so i hope you enjoyed this video if you have any questions i'd love to hear from you in the comments down below check out the description for links and more information and other videos you may like if you enjoyed this video consider giving it a like so that youtube knows and if you know someone in real estate who might appreciate this video whether they're real estate agent or looking to grow their wealth and invest in rental properties or flipping do send them this video to help them out as well and if you're new here don't forget to subscribe and possibly hit the bell to be notified when new videos come out that's all for now i hope to see you next time bye

Channel: Business Finance Coach

Views: 24,923

Keywords: Disadvantages of LLC for rental property, Pros & cons of LLC for rental property, Single member LLC for rental property, Should I setup a company for my rental property?, Forming an LLC for rental property traps for the unwary, LLC structure for multiple rental properties, Should you create a separate LLC for each rental property?, Should I start an LLC before buying a rental property, Should I put rental property in LLC?, How do I put my rental property into an LLC?, LLC, property, tax

Id: etNzJ5v801w

Length: 15min 24sec (924 seconds)

Published: Thu Jul 08 2021