Are Rental Property Investments Worthwhile?

How Should They Be Set-Up Tax-Wise?

Speaking with several multi-rental property owners over the years, there’s just a multitude of options that people choose and each one is always dependent upon what a person or persons chooses to pursue.  However, each route has its own benefits and challenges, so we’re going to look at some of the more popular ideas.

Disregarded Entity

  • This is the same option as being a sole proprietor of a business. If you set it up as a Limited Liability Company (LLC), then what happens is that you have a level of liability protection, but it goes onto a Schedule C onto your personal tax return.  In Texas, it’s filing the appropriate form with the Texas Secretary of State, and from there it’s recommended that you should consider utilizing the same name for your checking account that you receive your income and pay your bills from so you demonstrate a separation between you personally and the property.  This will also include getting your own Federal Employer Identification Number for it.

Corporation

  • A little bit more complicated, it involves you personally becoming a shareholder into the company, again filing the appropriate form with the Texas Secretary of State and utilizing a separate bank account for all transactions. This requires a separate tax return filing, offering you more separation between you and the entity, giving you a more defined approach for tax liability purposes.

Management Corporation

  • If you choose to set-up the physical property in its own corporation, another layer of separation is setting up a separate management company to handle the regular transactions of the business between your renter(s) and the physical property entity. How this would be workable is giving a 1% share of the physical property to the management company, therefore they become the manager in all paperwork with the entity itself, including rental agreements, insurance, etc.

Series LLC in Texas

  • This option allows you to create a LLC with a subset of LLCs as long as you still must keep each entities transactions separate, but they are treated as separated businesses. Each sub-LLC therefore becomes its own asset for liability purposes, with its own FEIN, bank account, but a Schedule C or E will need to be completed and posted onto your personal tax return.

The reason there are options is that it allows you to determine what’s going to be working for you in the current state of your needs.  From there if you choose to go a different path later then there’s always the option of choosing what best fits your needs.

Dwayne J. Briscoe