Rental Property Ownership

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

When forming an entity, you will have to visit SOS.WA.GOV to register.

Note: This guide wont serve to replace the expert council of a Redmond certified public accountant or tax attorney. You should seek qualified professional counsel when setting up an entity and shifting ownership of a rental property.

Individual Ownership

This is the most common and the most straight forward method of ownership and occurs when you purchase a 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 big benefit is that this is straightforward, for one it doesn’t require you to file any complicated paperwork or pay any heavy filing fees. The biggest disadvantage to this form of ownership is that your creditors may be able to force a sale of the rental property if they receive a mandate against you, or compel you into an involuntary bankruptcy.

Legal Entity Ownership

Legal entities include limited liability companies, corporations, general partnerships, and limited partnerships. Let’s take a look at the differences in a bit. Now we’ll look at the major advantage of entity ownership, that being with entity ownership your personal creditors can’t force a sale of the rental property. The only entity type that does not require registration with the secretary of state is the general partnership. Regarding taxes, the entity type does not matter that much because in most cases rental income is taxed on your personal tax return, or “passes through”, See the article titled “Necessary Tax Forms for Reporting Rental Activity,” which is included in the Landlord Tax Guide.

General partnership. The partnership is an association of two or more people to carry on as co-owners of a for-profit business. Generally partnership, each partner will have equal management rights, but is personally liable for the debts of the partnership. And regarding that liability, a general partnership is generally not ideal.

Limited partnership. A limited partnership is more tricky as this method of ownership calls for at least one general partner and one limited partner. The limited partner isn’t personally liable for the debts of the partnership, but then again has no management rights. Now the general partner has sole management rights, together with personal liability for any debts of the partnership. This arrangement is typically not advised.

Limited liability partnership/company (LLPs or LLCs). A limited liability company and a limited liability partnership are quite similar entities, both providing for limited liability to partners/members. This means you will not be personally liable for the debts of the entity, that is unless the debt is a result of your own wrongdoing. This type of ownership often is preferable because of limited liability and there are fewer formalities which require observance than with corporations.

Corporations. This kind of ownership offers you limited liability and allows for perpetual existence. Although they also require the observance of special formalities for you to maintain the limited liability guard. So for this reason that LLPs or LLCs are sometimes more apt for your purposes. Also worthy of mentioning is that corporations have the distinction of being either c-corp or s-corp. When a corporate entity is taxed as a c-corporation, then it pays tax on rental income, and then you will pay tax (again) when the corporation pays dividends. And it is more desirable to avoid the double-taxation trap whenever it is possible.

Tax CPA  has written extensively on taxes and accounting. He is a graduate of the University of Washington and Washington State University.

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

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