Understanding LLCs For Rental Properties

Added May 15, 2007 by Ilyce R. Glink and Samuel J. Tamkin

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Summary: An LLC is a distinct type of entity that is neither a partnership nor a corporation. Instead, and LLC is a company structure that allows owners to have limited liability in case the company has difficulties. Unlike a corporation, an LLC does not have shareholders, but rather it has members.

Q: I read your column in the Tampa Tribune every week, and find the information helpful when advising my (tax) clients. However, I want to comment on a recent column on limited liability companies (LLC) for rental properties.

You seem to suggest that all LLCs are, or should be, corporations. This is not necessarily true. LLCs owned by one individual can be ignored for tax purpose and the rental profit and loss can still be reported on Schedule E of the 1040 federal income tax return. Hence, there should be no additional return preparation expense or accounting fees for using the LLCs.

Would using this single-member LLC approach may make it easier to re-title the mortgages? Who knows! I'm only a tax guy!

A: Thanks for your comment. While it may be true that LLCs can be treated either as a corporation or partnership for federal tax purposes, an LLC is never a true corporation.

An LLC is a distinct type of entity that is neither a partnership nor a corporation. Instead, it is a company structure that allows owners to have limited liability in case the company has difficulties.

Unlike a corporation, an LLC does not have shareholders, but rather it has members. Unlike a partnership, where the partners may be equally and completely liable for the debts of the partnership but the profit and losses for income tax purposes flow directly to the partners, the LLC structure gives its members liability protection and also allows profits and losses to flow to its members.

Thanks for pointing out that a unique benefit to an LLC that has a single member is that the IRS will disregard the LLC for income tax purposes. That is a great benefit from an accounting perspective and to keep things simple.

Thanks for adding to the discussion.

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