Rental Property Ownership

This Introductory article of the Landlord’s Tax Guide (Guide) discusses the types of entities for the ownership of rental properties. Below, you’ll see the different entities have their disadvantages and advantages. However, the aim in each case is to limit your liability and safety-guard your real estate from unsecured creditors.

When establishing an entity, you will have to visit Washington State Entity Registration to register.

Note: This landlord tax guide wont serve to replace the expert council of a certified public accountant or tax attorney. You should seek qualified professional help when establishing an entity and transferring ownership of a rental property.

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 name. This includes owning the property with your spouse, or as joint tenants or tenants in common with someone else. The big benefit is that this is straightforward, and does not require the filing of any complicated paperwork or pay any lofty filing fees. The main disadvantage to this kind of ownership is that your creditors might be able to force a sale of the rental property if they receive a court order against you, or force you into involuntary bankruptcy.

Legal Entity Ownership

Legal entities include general partnerships, limited partnerships, limited liability companies, and corporations. The differences between these entities are important. We’ll outline them below. The main advantage to entity ownership is that your personal creditors are not able to force a sale of the rental, since you do not 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 entity type chosen does not matter a whole lot because in most cases, income from the rental property “passes through” from the entity and is taxed on your personal tax return (but do note the cautionary note under corporations). Cover the article titled Necessary Tax Forms for Reporting Rental Activity, which is included in this tax guide for landlords, for more on precisely how rental income is taxed.

General partnership. A partnership is an association of two or more people who carry on as co-owners of a business for profit. In a general partnership, each partner will have equal management rights, but is personally liable for the debts of the partnership. Thus, a general partnership is generally not recommended.

Limited partnership. This entity is more complex than the general partnership because it requires at least one limited partner and one general partner. The general partner has sole management rights, together with personal liability for any resultant debts. Whereas, the limited partner isn’t personally liable for debts of the partnership and then again has no management rights. This entity selection is generally not recommended.

Limited liability partnership/company (LLPs or LLCs). A limited liability partnership and a limited liability company are fairly similar entity types, both providing for limited liability to the partners/members. This would mean that you are not personally liable for the entity’s debts, that is unless the debt is due to your own wrongdoing. This mode of ownership is usually preferable because of limited liability plus there are fewer formalities to observe than with corporations.

Corporations. Corporations permit perpetual existence and limited liability. However, they demand the observance of specific formalities in order to keep the limited liability protection. Without these formalities, a court mandate may “pierce the corporate veil” and hold you personally culpable. For this reason, LLCs and LLPs are often more desirable for your purposes. Furthermore, for tax purposes, corporations are split into s-corporations and c-corporations. If a corporation is taxed as a “C” corporation, it will pay tax on the rental income, and then you will pay tax once again when the corporation pays you dividends. And you should avoid this “double taxation” trap.

CPA has written extensively on taxes and accounting. He is a graduate of the University of Washington’s School of Law, with a Juris Doctorate and a Masters in Tax Law.

Seattle CPAsAbout Seattle CPAs
Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. Since 2002, he has been the owner of his own small business, Huddleston Tax CPAs. He is a graduate of Washington State University and the University of Washington School of Law.

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