Ownership of Rental Properties

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

TIP: To establish one of the entities discussed below, registration forms must be submitted with the Washington Secretary of State’s office. These forms are available at: SOS.WA.GOV.

TIP: Consult with a tax attorney or certified public accountant before establishing an entity and transferring ownership of a rental property. This Guide isn’t meant to be a comprehensive solution you should seek the care of a qualified professional.

Individual Ownership

This is the more common and the most straight forward form 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 main benefit is that this is straightforward and simple, for one it does not require the filing of any complicated paperwork or pay any heavy filing fees. The principal disadvantage to this form of ownership is that your creditors could force a sale of the rental property if they receive a court judgment against you, or force you into an involuntary bankruptcy.

Legal Entity Ownership

Legal entities include general partnerships, limited partnerships, limited liability companies, and corporations. The differences between the entities are important and outlined below. The main advantage to entity ownership is that your personal creditors are not able to force a sale of the rental, considering you do not 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 does not matter a whole lot because in most cases, rental income “passes through” from the entity and is taxed on a personal tax return (but do note the cautionary note under corporations). Read the article entitled Necessary Tax Forms for Reporting Rental Activity, which is included in this Guide, for more details on how rental income is taxed.

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

Limited partnership. This entity is more complex than a general partnership because it requires both one limited partner and a general partner. The general partner has sole management rights, and personal liability for any resultant debts. Whereas, the limited partner isn’t personally liable for debts of the partnership and additionally is without management rights.

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 and partners. This would mean that you are not personally liable for the debts of the entity, that is, unless the source is your own wrongdoing. This form of ownership is often superior as it will reduce liability and reveals fewer formalities than those of the corporation.

Corporations. Corporations permit limited liability and perpetual existence. Although, they demand the observance of unyielding formalities so as to sustain the limited liability guard. In the absence of these formalities, a court may very well “pierce the corporate veil” and hold you personally responsible. It is for this reason that LLCs and LLPs are usually more desirable for your purposes. Additionally, for the purpose of taxation, corporations are split into c-corporations and s-corporations. When the corporation is taxed as a “C” corporation, it pays tax on rental income, and then you will pay tax once more when the corp pays you dividends. You should obviate this “double taxation” loop.

CPA +John Huddleston has written many tax and finance related articles. He holds a masters in tax law and a juris doctorate from the Universityf of Washington School of Law.