Ownership of Rental Properties

Let’s focus on the possible types of entities as they relate to rental property ownership. In later articles we will move on to look more microscopically, but for now let’s make sure you are starting from a strong base. 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.

TIP: To form any of the entities discussed below, registration forms must be registered with the Washington Secretary of State’s office. Find the forms at: Washington State Entity Registration.

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

Individual Ownership

This is the simpler and more commonplace method of establishing ownership. This is when you purchase a property in your own name. The big disadvantage of this form of ownership is that your creditors are able to force a sale of the rental property if they receive court mandate, or they might compel you into involuntary bankruptcy. A main advantage of this form of ownership is that the process is simple, without difficult forms or heavy filing fees.

Legal Entity Ownership

Legal entities include limited partnerships, general partnerships, limited liability companies, and corporations. We’ll look at the differences in a bit. First we’ll look at the principal appeal of entity ownership, and this would be that with entity ownership your personal creditors cannot force a sale of a rental property. The only entity type that doesn’t require registration with the secretary of state is a 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. A partnership is an association of two or more people to carry on as co-owners of a for-profit business. Generally partnership, each partner has equal management rights, but is personally liable for the debts of this partnership. Thus, a general partnership is usually not recommended.

Limited partnership. This entity is more complex than a general partnership as it requires both one limited partner and a general partner. The general partner has sole management rights, plus 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 partnerships (LLPs) or limited liability company (LLCs). A limited liability partnership and a limited liability company are similar forms of entity selection. Both provide limited liability to the partners and members. Meaning that you are not personally liable for the entity’s debts, that is, unless debts are resultant from your own wrongdoing. This form of ownership is often preferable as it will reduce liability and reveals fewer formalities than those of the corporation.

Corporations. This kind of ownership gives you limited liability and also allows for perpetual existence. Although they also require the observance of specific formalities so that you can maintain this limited liability guard. It is under this reasoning that LLCs or LLPs are often times more suiting to your purposes. Also worthy of making note is that corporations are categorized as either c-corporation or s-corporation. When a corporate entity is taxed as a c-corp, then it will pay tax on rental income, and then you’ll pay tax (again) when the c-corp pays dividends. And it’s more desirable to side-step the double-taxation trap when you are able to.

Accountant +John Huddleston has written prolifically on the subjects of accounting and taxes. He is a graduate of the University of Washington School of Law, holding a Juris Doctorate and a Masters in Tax Law.