Moving Your Rental Property Into An LLC

By Jason Watson, CPA
Posted Monday, August 5 2024

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

• Separate checking account for compartmentalization.

• Anonymity.

• Orderly ownership (wealth) transfer baked into the Operating Agreement side-stepping Wills and Trusts.

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 annually.

Contrary to what your produce clerks says, you don’t get-

• Extra tax deductions.

• Tort liability protection or iron-clad asset protection.

Again, please refer to our expanded section on the benefits of putting a rental into a multi-member limited liability company taxed as a partnership.

Basic Steps

What are the basic steps to get this accomplished? The first step is to contact your lender. Because they have your title on lockdown, you will need to coordinate with them. Since 2010 or so, this is a much-accepted common practice and the hurdles are very few and small.

The second step is to connect with a title company to perfect all the recording magic. An attorney can likely handle this as well, and likely can bundle the LLC formation, Operating Agreement drafting for your specific needs including estate planning and then the ultimate title transfer.

Other Considerations

Keep in mind these other considerations when you move your primary rental property into an LLC-

• You might trigger transfer taxes with the county or local tax jurisdiction including HOAs.

• Your historical depreciation and fixed asset listing from your individual tax return (Form 1040) just slides on over. You do not reset your depreciation or get a step-up in basis.

• You are contributing property to the LLC. It is unlikely this will be viewed as a sale, but be aware that you might accidentally trip this wire (again unlikely, especially if you use qualified professionals such as attorneys, title agents, etc.).

• Leases, permits, contracts and utilities will need to be updated with the name of the LLC. Banking information for auto-pay will also need updating.

• If your LLC is owned by you and your spouse, you might suddenly create a partnership tax filing obligation depending on your state (community property versus common law property). This is not all bad. There might be some benefits, and we discuss them in our section on rental property partnerships.

• WCG CPAs & Advisors usually recommend naming the LLC after the address such as 1234 Main Street LLC.