Rental Property Ownership

Let’s launch off by having a look at the various entity selection types that are available. Each has pros and cons. As a rule of thumb, you’ll aim to protect your property from unsecured creditors and limit your liability. So let’s unroll the list and see what we’ve got here.

TIP: To form any of the entities presented below, the applicable registration form and fee will have to be filed with the Washington Secretary of State’s office. Gain access to the forms at: SOS.WA.GOV

Note: This guide wont serve to replace the expert council of a Redmond CPA or attorney. You should seek qualified professional help when setting up an entity and transferring ownership of a rental property.

Individual Ownership

This is the simpler and most common method of establishing ownership. This is when you purchase a rental property in your own name. A significant disadvantage of this form of ownership is that your creditors may be able to force a sale of the rental property if they receive a court order, or they might compel you into involuntary bankruptcy. A main plus to this form of ownership is that the process is simple, without tricky forms or heavy filing fees.

Legal Entity Ownership

Legal entities include limited liability companies, corporations, general partnerships, and limited partnerships. Let’s look at the difference a bit later. First let’s look at the leading benefit of entity ownership, that being with entity ownership your personal creditors cannot force a sale of the rental property. The only entity type that does not require registration with the secretary of state is a general partnership. Regarding taxes, you’ll see the entity type doesn’t matter that much because in most cases rental income is taxed on your personal tax return, See the article titled “Necessary Tax Forms for Reporting Rental Activity,” which is included in the Landlord Tax Guide.

General partnership. This form of ownership takes place when two or more persons co-own a for profit business. Now with this general partnership the partners have equal management privileges, however each partner is personally liable for any incurring debts of the partnership. And thereby a general partnership is most often not preferred.

Limited partnership. This entity is more complex than the general partnership as it requires at least one limited partner and one general partner. The general partner has sole management rights, along with personal liability for any resulting debts. Whereas, the limited partner isn’t personally liable for debts of the partnership and moreover has no management rights.

Limited liability partnership or limited liability company. A limited liability partnership and a limited liability company are similar forms of entity selection. Both of them provide limited liability to the members and partners. Meaning that you are not personally liable for the debts of the entity, that is, unless the debts result from your own wrongdoing. This form of ownership is often preferable as it lessens liability and reveals fewer formalities than those of the corporation.

Corporations. Corporations enable limited liability and perpetual existence. However on the other hand, they demand the observance of certain formalities so as to maintain the limited liability shield. Without these formalities, a court may “pierce the corporate veil” and hold you personally responsible. It is for this reason that LLPs and LLCs are usually more desirable for a rental property owner. Furthermore, for tax purposes, corporations are split into s-corporations and c-corporations. If the corporation is taxed as a “C” corporation, it will pay tax on the rental income, and then you will pay tax once more when the corp pays out dividends. And you should steer clear of this “double taxation” snare.

Redmond Accountant +John Huddleston has written articles for many years on accounting and taxes. He is a graduate of the University of Washington School of Law, with a Juris Doctorate and a Masters in Tax Law.