Ownership of Rental Properties

This article takes a look at the various types of entities for the ownership of rental properties. Below, you’ll see that different entities have their disadvantages and advantages. However, the goal in each case is to limit your liability and safety-guard your rental property from unsecured creditors.

Also seek the counsel of an accountant or Seattle CPA before establishing an entity and transferring ownership of a rental property. Do note, this guide isn’t a comprehensive replacement for specialized council.

TIP: Always consult with a certified public accountant or tax attorney prior to establishing an entity and transferring ownership of your rental property. This Guide is not meant to be a comprehensive solution you should seek the attention of a qualified professional.

Individual Ownership

This is the simpler and more widespread method of taking ownership. This is when you purchase a property in your own name. The key 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 heavy filing fees or intricate forms.

Legal Entity Ownership

Legal entities include general partnerships, limited partnerships, limited liability companies, and corporations. The differences between the entities are important and outlined below. The major advantage to entity ownership is that your personal creditors are unable to force a sale of the rental, since you don’t own it. The only type of entity that does not require registration with the Secretary of State is the general partnership. For tax purposes, the entity type chosen does not matter too much because in most cases, income from the rental property “passes through” from the entity and is taxed on a personal tax return (but do note the cautionary note under corporations). See the article titled Necessary Tax Forms for Reporting Rental Activity, which is included in this Guide, for more details on how rental income is taxed.

General partnership. The partnership is an association of two or more people who carry on as co-owners of a business for profit. In a general partnership, each partner has equal management rights, but is personally liable for the debts of this partnership. So, a general partnership is usually not ideal.

Limited partnership. A limited partnership is more tricky as this method of ownership involves one limited partner and at least one general partner. The limited partner will not be personally liable for any debts resulting from the partnership, but also has no management rights. The general partner has sole management rights, coupled with personal liability for the debts resulting from the partnership. This arrangement is also usually not advised.

Limited liability partnership/company. A limited liability partnership and a limited liability company are pretty similar entity types, both providing for limited liability to partners/members. This would mean you will not be personally liable for the entity’s debts, except in cases when the debt is due to your own wrongdoing. This form of ownership is often preferable because of limited liability plus there are not as many formalities which require observance than with corporations.

Corporations. This kind of ownership delivers limited liability and also allows for perpetual existence. Although this selection of ownership requires the upholding of specific formalities for you to maintain this limited liability status. So under this reasoning that LLCs and LLPs are commonly more desirable for your aims. Also worthy of noting is that corporations fall under one of two categorizations: s-corporation or c-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 is preferred to avoid the double-taxation trap.

West Seattle Accountant +John Huddleston has written several articles on accounting and tax issues that small businesses face. He is a graduate of Washington State University and the University of Washington.