What you’ll discover:
Are landlords classified as company owners?
Is it a good idea to incorporate my rental property?
What kind of organization should I set up to manage my rental property?
Can I reside in a property that my LLC owns?
As a landlord, you must deal with a variety of issues, from late-night phone calls about leaking water to ensuring that tax payments are made on time. It might be tough to remember that there are some legal issues of your rental property that you should consider with the continual demands of day-to-day life.
Many landlords are unaware that they are operating a company when they rent out a house, even if they just own one. As a company owner, you should take precautions to protect yourself against legal claims before they become major problems. In this section, we look at the commercial elements of your rental that you may not have considered.
Table of Contents
Are landlords classified as company owners?
While there is significant disagreement regarding what defines a “company,” the IRS employs the most popular definition for tax purposes. In general, it will be deemed a business if you rent the property for a profit and work on it on a regular and ongoing basis. The IRS considers various variables to determine whether a rental property is a business:
Is this a business or residential property?
How many homes do you own?
How much time do you spend on a daily basis at the property?
Are any auxiliary services included in the lease?
Is the lease for a lengthy or short period of time?
Have you submitted all of the mandatory information returns?
The IRS has a low standard for determining that your rental property is a commercial activity. If you pay someone else to conduct the majority of the hands-on work at your rental property, you may even be regarded a company owner.
The third option is that your rental property is an investment rather than a company. You do not work on the property on a regular or continuous basis for it to be deemed an investment. It may, however, provide a profit for you.
Is it a good idea to incorporate my rental property?
If you possess rental properties and do nothing to manage your company legally, you are automatically labeled a single proprietor. It means nothing stands between you and your company. You submit an additional schedule on your taxes to record revenue, but there is nothing more you need to do legally to manage your rental property.
Operating a rental property as a single proprietorship is unquestionably the simplest legal structure to establish. Nevertheless, it is not the most secure. If anything goes wrong with your property, such being sued or having to deal with an unpaid debt, your personal assets are at danger.
Consider the following scenario: your tenant has a guest in their house. They recently reported an unsafe stair to you, but you have yet to repair it or send someone over to inspect it. Your visitor steps on the stair, it breaks, and your visitor falls through the step, injuring their legs.
If you have a sole proprietorship in this case, the renter’s visitor may be entitled to sue you directly for their injuries. They may garnish your bank accounts and earnings if you have to pay for their damages. They have the authority to take your personal assets, including any rental properties you possess.
If you form a legal corporation to hold your real estate, the only asset at risk is whatever that new business possesses, which is usually simply the real estate or a bank account where rental payments are deposited. It is a good idea to incorporate your rental property to provide you with extra security, particularly if you own many properties.
What kind of organization should I set up to manage my rental property?
You have numerous alternatives for business companies to protect yourself as a landlord. One of the most typical ways to incorporate rental property is to form a limited liability company, or LLC.
An LLC combines the best features of a single proprietorship and a corporation. It does not need as many formalities to keep it going as a corporation would, particularly if it is just one owner. It also provides you with limited responsibility, which safeguards your personal assets in the event that anything goes wrong with your rental property.
There are times when an LLC is not the greatest solution for a landlord. You should consult with a lawyer about your specific legal circumstances to decide which option is best for you.
Can I reside in a property that my LLC owns?
Theoretically, you may reside in a property owned by your LLC. Yet, in certain cases, you risk nullifying the safeguards provided by your single-member LLC.
If you reside in your rental home, the IRS will also restrict the number of deductions you may claim for rental expenditures. In principle, you are deemed to be living in a rental property if you use it for 14 days in a calendar year or 10% of the total days you rent it to others at a reasonable rental charge.
