Ownership of Rental Properties

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

When forming an entity, you’ll have to visit www.sos.wa.gov to register.

TIP: Consult with a Bellevue Accountant or attorney before establishing an entity and transferring ownership of your rental property to it. This landlord tax guide isn’t meant to be an all-in-one solution you should seek the attention of a qualified professional.

Individual Ownership

This form of ownership is the most common and simplest method 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 advantage here is that this is straightforward, and does not require you to file any complicated paperwork or pay any lofty filing fees. The main disadvantage to this kind of ownership is that your creditors may be able to force a sale of the rental property if they attain a court judgment against you, or compel you into involuntary bankruptcy.

Legal Entity Ownership

Legal entities include limited partnerships, general partnerships, limited liability companies, and corporations. Let’s look at the differences a bit later. Now let’s look at the principal benefit of entity ownership, and that would be that 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 the general partnership. Regarding taxes, 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 each partner has equal management privileges, however each partner is personally liable for the debts of this partnership. And thus a general partnership is usually not preferred.

Limited partnership. A limited partnership is more complex because this method of ownership involves one limited partner and at least one general partner. The limited partner will not be personally liable for the debts resulting from the partnership, but also has no management rights. Now the general partner has sole management rights, as well as personal liability for the debts of the partnership. This arrangement is generally not recommended.

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

Corporations. Corporations allow for perpetual existence and limited liability. And yet on the other hand, they demand the observance of unyielding formalities so as to preserve the limited liability shield. Without these formalities, a court order may “pierce the corporate veil” and hold you personally culpable. It is for this reason that LLPs and LLCs are typically more desirable for a rental property owner. Additionally, for tax purposes, corporations are split into “S” corporations and “C” corporations. When a corporation is taxed as a “C” corporation, it pays tax on the rental income, and then you will pay tax again when the corp pays out dividends. And you should steer clear of this “double taxation” catch.

Bellevue Tax CPA +John Huddleston is a graduate of both the University of Washington and Washington State University. He has written numerous articles on various tax related subjects.