LLC Benefits For Rental Properties

By Jason Watson, CPA
Posted Sunday, May 25, 2025

There are several benefits of owning your rental property in an LLC as we’ve discussed throughout the chapter. Here is a summary-

• Separate checking account for compartmentalization. However, you could easily open another personal checking account for the same effect.

• Anonymity provided the state allows for displaying the registered agent only (many do, but many also list the “organizer” who is normally you, the person). If a state requirements additional ownership reporting beyond a registered agent, a multi-tiered or multi-entity arrangement can solve this such as a Wyoming LLC owning a Texas LLC, which we discuss in more detail.

• Orderly ownership (wealth) transfer baked into the Operating Agreement side-stepping Wills and Trusts. This is super efficient when a holding company LLC owns a gaggle of other LLCs that each own a rental.

• Division between the holding company and the operating company.

Additional Benefits of LLCs Owning Rental Properties

With a multi-member LLC you also get these fun things-

• Lower audit rates. Not that you’re trying to do anything nefarious, but who wants to defend their actions if avoidable?

• Mechanically show the basis in the rental property absorbing (cloaking) that big depreciation deduction from your even bigger cost segregation report.

• Rules of the road for all members (owners) of the rental property or real estate venture including deal structures.

• Exit strategies including divorce, death, valuation approaches, etc.

• Some, yet flimsy, protection with Charge Orders and other financial protections.

In the interest of fair play, here are the downsides with an LLC owning a rental-

• Additional tax return and the associated preparation fees in a multi-member LLC environment (unless you are in a community property state).

• Annual Secretary of State filings. Some states are cheap, some are insanely expensive.

• Franchise tax or some sort of LLC fee charged by a state’s Department of Revenue (which are separate from Secretary of State filings… they get to double their pleasure).

Another LLC Consideration

By having an LLC own the rental property, you might be able to avoid transfer taxes and fees. What are we getting at here? Many local jurisdictions, HOAs and other governing bodies impose a transfer tax or fee when the title of the real estate changes hands. What if the title never changes hands? Huh?

What if instead of selling the rental property itself, you sell your interest in the LLC or other business entity that hold the title? This might add some complexity or even risk for your buyer, but then again, some transfer taxes and fees are shared in a real estate transaction. As such, there is some motivation.

Sidebar: In most business transactions, buyers purchase the assets of the entity or operation versus buying the entity outright. This is for two primary purposes- buyers don’t want the historical risk that tags along with a business entity, and they usually want to reset the depreciation schedules including acceleration and Section 179 expensing.

The big downside to selling the LLC outright is the depreciation issue just mentioned. The buyer would need to continue with the same depreciation cadence even if the underlying asset (the rental property) has appreciated greatly. And No, there are rules preventing arbitrage where the new buyer buys into the entity as a co-owner, receives a step-up in basis to reset depreciable basis and clocks through an IRC Section 754 election, and then buys out the remaining interest in a bang-bang transaction.

The right circumstances would need to come together including the right people- we don’t see this often, but bring it up just the same.