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Rental property carries risk that an owner cannot always see in advance. A tenant gets hurt, a contractor sues, a dispute goes bad. Many owners ask whether an LLC would keep a claim from reaching their home and savings. The answer is partly yes and partly depends on how you set it up.
What an LLC may do
The SBA says LLCs protect you from personal liability in most instances, and that personal assets like a vehicle, house and savings are not at risk if your LLC faces bankruptcy or lawsuits. Read it on the SBA business structure page. Notice the words "in most instances." Courts can look past an LLC that is run carelessly, and you stay responsible for your own acts.
To keep the separation, give the LLC its own bank account, sign leases in the LLC's name, and keep records. See the LLC bank account guide and the operating agreement guide.
How the IRS handles rent
The IRS says on its rental income topic page that real estate rentals are usually reported on Schedule E (Form 1040). If substantial services are provided mainly for the tenant's convenience, Schedule C applies instead. The same page says cash or the fair market value of property or services you receive for the use of real estate is taxable rental income, and that repair costs are usually deductible. Depreciation uses Form 4562.
For a single-member LLC, the IRS page on single-member LLCs says the owner reports rental or supplemental income on Schedule E, because the LLC is disregarded for income tax by default. The IRS Schedule E page says the schedule is for income or loss from rental real estate, royalties, partnerships, S corporations and certain other sources.
With two or more members, the LLC is a partnership by default and files Form 1065. See LLC taxes.
Costs and steps to weigh
- Your state's formation fee and any annual report or franchise charge. Compare states on LLC fees by state.
- A registered agent. See registered agent services.
- Separate bank account and bookkeeping.
- An EIN for the LLC if you want one. See EIN for an LLC.
- Title and mortgage questions. Ask the lender before any transfer.
- Insurance that names the LLC.
If the property is in a different state from where you live, the state where it sits may have its own rules for foreign LLCs. See foreign LLC registration.
Other ways to organize
One LLC can hold several properties, which is simple but puts them in one pot. Separate LLCs keep them apart at higher cost. A series LLC tries to do both, where the state allows it. A holding company LLC can sit above several property companies.
Your state page shows the filing details, for example Florida or Texas.
This is general information, not legal or tax advice. An attorney and a tax professional can tell you what fits your property.
To file, go to start an LLC.