For a multitude of reasons, incorporating your rental property company may be a wise decision. In this section, we’ll go through the tax ramifications of incorporation for rental property owners.
What you’ll discover:
Should I register as a landlord?
Under an S-Corporation, how is rental revenue taxed?
With an LLC, how is rental revenue taxed?
Are there any tax implications to establishing my rental property business?
Is it a good idea to incorporate your rental property business?
If you own one or more rental properties or are considering becoming a landlord, you should investigate if it makes sense to formalize your company structure by incorporating or forming a Limited Liability Company (LLC). Whether you rent out a room in your house, have vacation property that you lease out during the summer, or own a multi-unit apartment complex, you may want to incorporate for the possible tax benefits.
Table of Contents
Should I register as a landlord?
For a number of reasons, formalizing your rental company by forming a distinct corporate organization may make sense. Using a separate business structure and separating your business income from your personal income can protect you from being personally liable for the financial obligations or potential future legal troubles of the business, whether you incorporate your rental business by creating a corporation or form an LLC under state laws.
Forming a company or LLC for your rental income also allows you to take advantage of business-related tax deductions, such as daily business expenditures, rental property taxes and insurance, maintenance and upkeep charges, property management costs, and even medical insurance premiums.
Under an S-Corporation, how is rental revenue taxed?
C-Corporations are taxed both at the corporate and individual shareholder levels. When you form an S-Corporation, the business’s gains and losses for earned income are passed through to its shareholders; the organization does not pay taxes on earned income.
Nonetheless, the IRS considers rental income to be “passive income” at times. If the corporate shareholders were not actively engaged in property management, this may be the situation. As a result, the income may be taxed at corporation tax rates rather than individual shareholder tax rates. Moreover, in certain cases, the amount of passive income for the business compared to its earned revenue may be too large for the organization to continue qualifying for S-corporation status under IRS guidelines.
With an LLC, how is rental revenue taxed?
If you set up your rental property company as an LLC, the revenue is taxed as pass-through income to the LLC’s members by default. If you are the only member of your LLC, you will report all revenue on your personal income tax returns and will be able to deduct business costs. Since there is no need for a separate income tax filing at the company level, you avoid the “double taxation” problem that might emerge with corporate companies.
Are there any tax implications to establishing my rental property business?
If you pick the sole proprietorship business structure, you must declare all rental revenues as income. This may place you in a higher tax bracket than if you formed your firm and paid yourself a wage.
Another thing to think about is putting real estate into an S-Corporation. If you transfer mortgage-secured property into an S-Corporation, you may be liable to corporation taxes under Internal Revenue Code Section 357.
Is it a good idea to incorporate your rental property business?
Although there are possible commercial and tax benefits to incorporating or creating an LLC for your rental company, keep in mind that both approaches come with formalities and duties that sole proprietors will not face. When it comes time to sell rental property controlled by a business, you may encounter unexpected tax repercussions.
If your major goal in contemplating incorporation is to restrict your exposure rather than to get tax benefits, you may be able to acquire liability protection instead by forming a trust or acquiring landlord insurance.
