Ownership of Rental Properties

Let’s take a look at the possible entity types as they relate to rental property ownership. In later articles we will use a fine-toothed comb, but for now let’s paint with broad brush strokes. You’ll see below the different entity selection types have advantages and disadvantages. As a guideline, you will want to limit liability and protect your property from unsecured creditors.

Also consult with an attorney or a CPA prior to establishing an entity and transferring ownership of a rental property. Do note, this guide is not a comprehensive replacement for qualified council.

TIP: Always consult with a CPA or tax attorney before establishing an entity and transferring ownership of your rental property. This Guide is just not meant to be a comprehensive solution you should seek the care of a qualified professional.

Individual Ownership

This is the more 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 main benefit is that this is straightforward and simple, and doesn’t require you to file any complicated paperwork or pay any lofty filing fees. The biggest disadvantage to this form of ownership is that your creditors could force a sale of the rental property if they attain a court order against you, or compel you into an involuntary bankruptcy.

Legal Entity Ownership

Corporations, general partnerships, and limited liability companies are all examples of legal companies. The differences between these entities are important. We’ll outline them below. The main advantage to entity ownership is that your personal creditors cannot force a sale of the rental, considering that you don’t own it. The only type of entity that does not require registration with the Secretary of State is the general partnership. As far as taxes are concerned, 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 your personal tax return (but do note the cautionary note under corporations). Read the article titled Necessary Tax Forms for Reporting Rental Activity, included in this tax guide for landlords, for more 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 this 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 generally not recommended.

Limited partnership. This entity is more complex than the general partnership as it requires both a limited partner and one general partner. The general partner has sole management rights, together with personal liability for any resulting debts. While, the limited partner is not personally liable for debts of the partnership and also is without management rights. This entity selection is generally not recommended.

Limited liability partnership/company. A limited liability partnership and a limited liability company are rather similar entity types, both provide for limited liability to the partners/members. This would mean you will not be personally liable for the entity’s debts, unless the debt is a result of your own wrongdoing. This kind of ownership often is preferable because of limited liability and also there are not as many formalities which require observance than with corporations.

Corporations. Corporations permit limited liability and perpetual existence. But, they also require the observance of specific formalities so as to preserve the limited liability protection. Without these formalities, a court mandate may “pierce the corporate veil” and hold you personally liable. For this reason, LLCs and LLPs are frequently more desirable for a rental property owner. Also, for tax purposes, corporations are split into “S” corporations and “C” corporations. If a corporation is taxed as a “C” corporation, it pays tax on rental income, and then you will pay tax again when the corp pays you dividends. And you should avoid this “double taxation” loop.

Tax Accountant +John Huddleston has written several tax and finance articles over the years. His a graduate of Washington State University and holds two post-graduate degrees from the University of Washington.