Rental Property Ownership

This article of the Landlord’s Tax Guide (Guide) discusses the various types of entities for the ownership of rental properties. Below, you’ll see that the different entities have different advantages and disadvantages. Regardless, the goal is to limit your liability and protect your property from any unsecured creditors.

TIP: To establish one of the entities discussed below, registration forms must be filed with the Washington Secretary of State’s office. These forms are available at: Washington Entity Registration

Note: This landlord tax guide wont serve to replace the competent council of a Seatac CPA or attorney. You should seek qualified professional help when setting up an entity and transferring ownership of a rental property.

Individual Ownership

This is the more common and the most straight forward method of ownership and occurs when you purchase the rental property in your own name. This includes owning the property with your spouse, or as joint tenants or tenants in common with someone else. The main advantage here is that this is simple, straightforward, and doesn’t require you to file any complicated paperwork or filing fees. The big disadvantage to this form of ownership is that your creditors are able to force a sale of the rental property if they receive a court order against you, or compel you into involuntary bankruptcy.

Legal Entity Ownership

Corporations, general partnerships, and limited liability companies are all examples of legal companies. The differences between these entities are important. We’ll outline them below. The main advantage to entity ownership is that your personal creditors can’t force a sale of the rental property, since you don’t own it. The only type of entity that does not require registration with the Secretary of State is the general partnership. For tax purposes, the type of entity chosen does not matter a tremendous amount because in most cases, income from the rental property “passes through” from the entity and is taxed on your personal tax return (but do note the cautionary note under corporations). See the article titled Necessary Tax Forms for Reporting Rental Activity, which is included in this tax guide for landlords, for more on how rental income is taxed.

General partnership. A partnership is an association of two or more people who carry on as co-owners of a business for profit. In a general partnership, each partner will have equal management rights, and are personally liable for the debts of the partnership. And regarding that liability, a general partnership is generally not recommended.

Limited partnership. A limited partnership is more complicated considering the fact that this method of ownership involves at least one general partner and one limited partner. The limited partner will not be personally liable for the debts of the partnership, but also has no management rights. The general partner has sole management rights, as well as personal liability for the debts resulting from the partnership. This arrangement is also generally not suggested.

Limited liability partnerships (LLPs) or limited liability company (LLCs). A limited liability partnership and a limited liability company are similar forms of entity selection. Both of them provide limited liability to the members/partners. This would mean that you are not personally liable for the debts of the entity, that is, unless debts are resultant from your own wrongdoing. This form of ownership is preferable as it lessens liability and presents with fewer formalities than those of the corporation.

Corporations. This type of ownership offers limited liability and also allows for perpetual existence. Although they also require the upholding of specific formalities so that you can maintain the limited liability status. Thus under this reasoning that LLCs or LLPs are commonly more suiting to your purposes. Also worth mentioning is that corporations are categorized as either s-corp or c-corp. When a corporation is taxed as a c-corporation, then it will pay tax on rental income, and then you will pay tax (again) when the corporation pays dividends. And it’s preferable to side-step the double-taxation trap whenever possible.

Accountant +John Huddleston is a graduate of Washington State University and the University of Washington. He has written extensively on numerous tax related topics.