Rental Property Ownership

Let’s launch off by having a look at the various entity selection types available. Each has advantages and disadvantages. As a rule of thumb, you’ll look to protect your property from unsecured creditors and limit liability. So let’s unroll the list and see what we’ve got here.

TIP: To form one of the entities presented below, registration forms will have to be registered with the Washington Secretary of State’s office. The forms can be found at: Washington State Entity Registration.

TIP: Always consult a tax attorney or certified public accountant prior to establishing an entity and transferring ownership of a rental property. This Guide is not meant to be a comprehensive solution you should seek the attention of a qualified professional.

Individual Ownership

This is the more common and simplest 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 advantage is that this is simple, straightforward, for one it doesn’t require you to file any complicated paperwork or pay any lofty filing fees. The key disadvantage to this form of ownership is that your creditors could force a sale of the rental property if they can attain a court judgment against you, or compel 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. We’ll outline them below. The main advantage to entity ownership is that your personal creditors won’t be able to force a sale of the rental, considering the fact that you don’t own it. The general partnership is the only type of entity that does not require registration with the Secretary of State. With regards to taxes, the entity type chosen does not matter very much because in most cases, rental income “passes through” from the entity and is taxed on your personal tax return (but do note the cautionary note under corporations). See the article titled Necessary Tax Forms for Reporting Rental Activity, which is included in this Guide, for further discussion on precisely how rental income is taxed.

General partnership. A partnership is an association of two or more people who carry on as co-owners of a business for profit. Generally partnership, each partner will have equal management rights, and are personally liable for the debts of the partnership. Thus, a general partnership is generally not ideal.

Limited partnership. This entity is more complex than a general partnership because it requires at least one limited partner and a general partner. The general partner has sole management rights, and also personal liability for any resulting debts. While, the limited partner is not personally liable for debts of the partnership and likewise has no management rights. This entity selection is generally not recommended.

Limited liability partnership or limited liability company. A limited liability partnership and a limited liability company are similar forms of entity selection. They both provide limited liability to the members/partners. This would mean that you are not personally liable for the entity’s debts, that is, unless the source is your own wrongdoing. This form of ownership is often preferable as it lessens liability and presents with fewer formalities than those of the corporation.

Corporations. Corporations enable limited liability and perpetual existence. But as a negative, they necessitate the observance of particular formalities in order to sustain the limited liability shield. Without these formalities, a court order could very well “pierce the corporate veil” and hold you personally culpable. It is for this reason that LLPs and LLCs are frequently more desirable for your purposes. Also, for tax purposes, corporations are split into c-corps and s-corps. When a corporation is taxed as a “C” corporation, it will pay tax on rental income, and then you will pay tax once more when the corp pays out dividends. And you should obviate this “double taxation” loop.

Seattle Accountant +John Huddleston has written prolifically on the subjects of accounting and tax issues for small businesses. He is a graduate of the the University of Washington School of Law with a Juris Doctorate and a Masters in Tax Law.