Limited Liability Companies are more popular than ever, especially with recent changes to the US tax laws. One of the most common uses for an LLC is holding investment real estate properties. There are many benefits to using an LLC for rental properties in Arizona. It is common, but that doesn’t mean that it will always be the best solution for a real estate investor. Here are the four main reasons to consider using an LLC for rental properties in Arizona.
1) Limit Your Personal Liability
The first reason to consider using a limited liability company for a rental property in Arizona is to limit your personal liability. The LLC structure will limit any liability to the assets of that company. This can be especially important when you are renting a property. You will not likely be aware of all the people that your renters host at the property. A simple injury or accident can lead to a lawsuit that can put your other assets and savings at risk.
Some real estate investors might point out that they can get liability insurance for their property. This is a risky position to take for any investor. Every insurance policy has limits and exceptions. These can lead to personal involvement in the case. Every knows that an insurance provider is likely to look for ways to avoid paying out a large settlement. There is no reason a savvy real estate investor cannot use both an LLC and some liability insurance for rental properties. The LLC structure will keep the investors personal assets out of reach from any claims or lawsuits related to the rental property. The liability insurance can be used to fight any claims or issues.
2) Separate Rental Properties
Separating your rental properties from each other is the second reason to use an LLC for each property in Arizona. For much the same reason that you want to shield your personal assets from liability, you do not want to risk your other investments if there is a claim or lawsuit involving one of your investment properties. The only way to effectively achieve this goal is to separate the properties into their own LLC structure. Simply having liability insurance on each property will not provide the same protection.
3) Benefit from Pass-Through Taxation
Investment real estate held in an LLC can enjoy the benefits of pass-through taxation since the IRS released Revenue Ruling 88-76 in 1988. Put simply, this means that LLCs can enjoy the liability protections of a corporation, but they will be taxed like partnerships. This allows for income and capital gains from the rental property to “pass-through” directly to the owners of the LLC. The owner(s) would only pay taxes as an individual on the income from the property that was dispersed to them. Single member LLCs are disregarded entities and might not even have to file tax returns. The individual owner would simply report the income on his or her personal tax return. A multi-member LLC will generally just file an informational tax return and would not have separate tax obligations for the LLC. As we are not tax professionals or accountants, you should absolutely review all tax documents with a professional before submitting to the IRS.
4) Simplify Accounting for Each Rental Property
The fourth reason to use a separate LLC for each rental property in Arizona is to simply the accounting. Each property will have unique expenses, deductions, repairs, rental income, insurance, and more. This process will be much simpler for your tax professional and you if you hold them in separate LLCs. An LLC is simple and inexpensive to setup and it delivers all these benefits for the real estate investor. Adding the simplification of all accounting is the final reason that it should be an easy decision for most investors to setup individual LLCs for each property. Of course, there is never a cookie-cutter answer when it comes to business operations, legal protections, or tax issues. These decisions should be discussed with an experienced real estate attorney in Arizona and tax professional before making your final decision.