Ownership of Rental Properties

Let’s begin by looking at the various entity selection types that are available. Each has positives and negatives. As a rule of thumb, you’ll look to protect your property from unsecured creditors and limit your liability. So let’s unroll the list and see what we’ve got.

TIP: To establish any of the entities presented below, registration forms must be submitted with the Washington Secretary of State’s office. Find the forms at: Washington Entity Forms.

TIP: Always consult with an attorney or Bellevue CPA before establishing an entity and transferring ownership of a rental property to it. This Guide is not meant to be a comprehensive solution you should seek the care of a qualified professional.

Individual Ownership

This form of ownership is the more common and simplest method of ownership and occurs when you purchase the rental property in your name. This includes owning the property with your spouse, or as joint tenants or tenants in common with someone else. The big benefit is that this is straightforward, and doesn’t require the filing of any complicated paperwork or filing fees. The key disadvantage to this form of ownership is that your creditors might be able to force a sale of the rental property if they can attain a court judgment against you, or force 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 and outlined below. The major advantage to entity ownership is that your personal creditors are not able to force a sale of the rental property, considering the fact that you don’t own it. The only type of entity that does not require registration with the Secretary of State is the general partnership. With regards to taxes, the entity type chosen doesn’t 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 see the cautionary note under corporations). Cover the article titled Necessary Tax Forms for Reporting Rental Activity, which is included in this Guide, for further discussion on just how rental income is taxed.

General partnership. This form of ownership takes place when two or more persons co-own a for profit business. Now with this general partnership each partner has equal management privileges, however each partner is personally liable for the debts of this partnership. And thereby a general partnership is most often not preferred.

Limited partnership. This entity is more complex than a general partnership as it requires both one limited partner and one general partner. The general partner has sole management rights, coupled with personal liability for any debts. Whereas, the limited partner is not personally liable for debts of the partnership and furthermore is without management rights. This entity selection is generally not recommended.

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 provide limited liability to the members and partners. This would mean that you are not personally liable for the entity’s debts, that is, unless the debts are the result of your own wrongdoing. This form of ownership is preferred as it reduces liability and allows fewer formalities than those of the corporation.

Corporations. Corporations allow for perpetual existence and limited liability. But on the negative side, they require the observance of particular formalities so as to preserve the limited liability protection. Without these formalities, a court could very well “pierce the corporate veil” and hold you personally liable. It is for this reason that LLPs and LLCs are ordinarily more desirable for a rental property owner. Additionally, for the purpose of taxation, corporations are split into s-corporations and c-corporations. When a corporation is taxed as a “C” corporation, it will pay tax on rental income, and then you will pay tax again when the corp pays you dividends. And you should steer clear of this “double taxation” snare.

Bellevue Tax Accountant has written prolifically within the subjects of accounting and taxes. He is a graduate  of the University of Washington’s School of Law, with a Juris Doctorate and a Masters in Tax Law.

Seattle CPAsAbout Seattle CPAs
Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. Since 2002, he has been the owner of his own small business, Huddleston Tax CPAs. He is a graduate of Washington State University and the University of Washington School of Law.

Speak Your Mind

Tell us what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!

  • Huddleston Tax CPAs / Huddleston Tax CPAs – Bellevue CPAs
    Certified Public Accountants Focused on Small Business
    40 Lake Bellevue Suite 100 / Bellevue, WA 98005
    (425) 273-6512

    Huddleston Tax CPAs & accountants provide tax preparation, tax planning, business coaching,
    QuickBooks consulting, bookkeeping, payroll, offer in compromise debt relief, and business valuation services for small business.

    We serve: Tukwila, SeaTac, Renton. We have a few meeting locations. Call to meet John C. Huddleston, J.D., LL.M., CPA, Lance Hulbert, CPA, Grace Lee-Choi, CPA, Jennifer Zhou, CPA, or Jessica Chisholm, CPA. Member WSCPA.