Should You Form an LLC for Rental Property? San Diego Investor Education
A Limited Liability Company, or LLC, is an entity that provides you with a certain level of protection against legal liability. Investment property owners will often ask if they should put their rental properties into an LLC, or if it’s better to own the property outside of an LLC and simply buy comprehensive liability insurance coverage. There is no right or wrong answer.
LLC for Investment Property: Cost and Coverage
If a tenant slips and falls and breaks a neck at your property, and you don’t own that property within an LLC, you’ll need enough insurance coverage to protect you. An LLC can provide legal liability protection in place of an insurance policy. We work with a number of clients who own rental property outside of an LLC, and we always advise that they buy as much liability insurance as they can. We also work with more conservative clients who are concerned about their legal exposure, and they form an LLC to hold the property title.
How to Form an LLC for Rental Property
If you decide to create an LLC for your rental property, you’ll need to have an attorney do it for you, unless you’re comfortable doing it through an online service like LegalZoom. You won’t be required to file federal income taxes for your LLC, but you do have to file a California income tax return. So, that’s an added cost to consider. There’s an $800 minimum tax that the state charges every year for an LLC. Your state tax could amount to $1,000 or $1,500 per year, which is about the same as what you’d pay for a good insurance policy that covers your liability.
Compare the costs of your insurance to what it would cost you to form and maintain an LLC. That will tell you which way will be most effective in protecting you against liability and financial loss. There’s not much tax difference in owning a property inside an LLC. It’s more of a legal liability issue.
If you have any questions about setting up an LLC for rental property or anything pertaining to property management in San Diego, please contact us at Mercer Properties.
Craig V. Castanos is a Certified Financial Planner and Certified Public Accountant located in San Diego, CA. He can be reached at 619.235.2131 or ccastanos@cvccpa.net.