13 Jun Do You Need an LLC for Your Rental Property?

If you own rental properties in Arizona, you may be wondering whether an LLC is something you really need. While LLCs aren’t mandatory for rental properties, they’re certainly a good idea. 

A Limited Liability Company (LLC) protects assets like real estate by making them into separate legal entities. LLCs give you more flexibility with taxes and keep your other assets safe if you ever face a lawsuit or creditors. 

Here are some more of the benefits that forming an LLC can provide to landlords. 

Do You Need an LLC for Your Rental Property? Four Potential Benefits

1: An LLC Limits Your Personal Liability

The most important benefit of forming an LLC for a rental property is to protect your personal assets. Landlords face many potential risks, such as tenant injuries, property damage claims, and legal disputes. And when a lawsuit happens, they can go after both your personal and business assets. 

For instance, if a tenant gets injured on your rental property and decides to sue, all of your personal assets become vulnerable to the lawsuit. That means you could lose your home, vehicles, and bank accounts in addition to the rental property. 

But if you form an LLC for your rental property, then the property becomes its own legal entity, separate from the rest of your assets. In most cases, a lawsuit from the tenant would then put only the rental property at stake. Your personal assets are shielded from being used to satisfy business debts from creditors or legal judgments in tenant lawsuits.

2: You Can Legally Separate Multiple Rental Properties

You also need to keep multiple rental properties separate from each other, not just from your other assets. If you own more than one rental property, you should form separate LLCs for each one. If you only form one LLC for multiple rental properties, then they all become vulnerable if a lawsuit is filed by a tenant from any property. 

3: An LLC Makes It Easy to Keep Business Expenses Separate

When you create an LLC for your rental property, you should create a separate bank account for the LLC as well. This makes it easier to separate your business expenses from your personal expenses. With separate bank statements, you can easily calculate and claim your rental property operating expenses on your taxes. 

4: It Offers Tax Flexibility

Operating your rental property through an LLC can also provide tax flexibility. With corporations, for example, the business gets taxed on its profits, and then the business owner gets taxed again when they make income. But because an LLC is considered a pass-through entity, it is exempt from business taxes. 

The rental income and expenses “pass through” the business and straight to your personal income, which you report on your personal tax returns. That means you can take advantage of deductions for mortgage interest, property taxes, repairs, and maintenance expenses—all of which can lower your taxable income. 

Setting Up an LLC in Arizona

If you’re considering forming an LLC for your rental property, contact Phelps LaClair. We can help you create an LLC and protect it with a trust. We’ve been helping Arizona business owners create secure estate plans for over 40 years. Give us a call at 480-892-2488 today to schedule a free consultation. 

Images used under creative commons license – commercial use (6/13/2023). Photo by Erik Mclean on Unsplash