Certain Tax Benefits of Rental Properties in an LLC

A quick summary of certain tax benefits associated with placing rental properties in a limited liability company

Many owners can benefit from placing rental properties in LLC's.

You may have seen video clips and mentions of placing rental properties in a Limited Liability Company (LLC) (including Series LLC's where permitted), yet we've noticed an uptick in inquiries regarding the potential tax benefits associated with this structure. Here is a short summary of the potential tax savings owners may find by placing their rental properties in an LLC:

Pass-Through Taxation

Placing rental properties in an LLC means an owner could avoid the double taxation corporations face. An LLC allows rental income and expenses to flow directly through to your personal tax return depending on the tax election of the LLC and number of members.

Maximizing your Deductions

Owners enjoy the benefit of deducting reasonable expenses such as mortgage interest, property taxes, repairs and maintenance expenses, property depreciation and more. These deductions result in helping to lower the owner's taxable income.

Qualified Business Income Deduction (QBI)

Under the QBI, LLC owners can deduct up to 20% of their net rental income. To qualify, you must treat your rental property activities as a trade or business, meeting IRS requirements such as active management or substantial services.

Offsetting Income with Losses

Rental properties often generate passive losses, which can offset other passive income sources. In some cases, real estate professionals who actively participate in property management may be able to deduct rental losses against ordinary income, further reducing tax liability.

Summary

While the tax benefits of an LLC are significant, it’s essential to consult with an attorney or tax professional to ensure you meet IRS requirements and maximize your savings. Factors such as your state laws, mortgage terms, and rental income will influence the best structure for your investments.

If you're ready to reduce your tax burden and structure your rental properties more efficiently, forming an LLC can be a powerful step toward achieving your financial goals.

Need Help? As a business law firm with specialization in real estate, corporate structuring, and general transactions, Spearus Advisors can help you navigate LLC formation, rental property management, and tax strategies tailored to your goals. Reach out for a consultation today!