Ownership of Rental Properties

Let’s focus on the possible entity types as they relate to rental property ownership. In later articles we will move on to look more microscopically, but for now let’s make sure you are starting from a strong base. You’ll see below the different entity selection types have pluses and minuses. As a guideline, the aim is to limit liability and protect your property from unsecured creditors.

When establishing an entity, you will need to visit SOS.WA.GOV to register.

TIP: Always consult an attorney or Redmond CPA prior to establishing an entity and transferring ownership of a rental property to it. This Guide is just not meant to be an all-in-one solution you should seek the attention of a qualified professional.

Individual Ownership

This form of ownership is the most common and the most straight forward form of ownership and occurs when you purchase the 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 you to file any complicated paperwork or filing fees. The major disadvantage to this type of ownership is that your creditors could possibly force a sale of the rental property if they receive a court judgment against you, or force you into involuntary bankruptcy.

Legal Entity Ownership

Legal entities include limited liability companies, corporations, general partnerships, and limited partnerships. Let’s take a look at the difference a bit later. Now we’ll look at the leading benefit of entity ownership, and this would be that with entity ownership your personal creditors can’t force a sale of a rental property. The only entity type that does not require registration with the secretary of state is a general partnership. Regarding taxes, the entity type doesn’t 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 rental property 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. In a general partnership, each partner will have equal management rights, and are personally liable for the debts of the partnership. So, a general partnership is ordinarily 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, plus personal liability for any resulting debts. While, the limited partner is not personally liable for debts of the partnership and also is without management rights.

Limited liability partnership/company. A limited liability company and a limited liability partnership are quite similar entities, both provide for limited liability to the partners/members. This means that you will not be personally liable for the entity’s debts, that is unless the debt is due to your own wrongdoing. This type of ownership is often preferable because of limited liability plus there are not as many formalities to observe than with corporations.

Corporations. Corporations enable perpetual existence and limited liability. Although, they also require the observance of particular formalities in order to preserve the limited liability protection. Without these formalities, a court mandate could very well “pierce the corporate veil” and hold you personally liable. It is for this reason that LLPs and LLCs are usually more desirable for a rental property owner. Additionally, for tax purposes, corporations are split into c-corps and s-corps. When the corporation is taxed as a “C” corporation, it will pay tax on rental income, and then you will pay tax yet again when the corporation pays you dividends. You should steer clear of this “double taxation” snare.

Redmond Accountant has written extensively on accounting and other tax related subjects. He is a graduate of the University of Washington School of Law, with a Masters in Tax Law and a Juris Doctorate.

Redmond CPAAbout Redmond CPA
Redmond CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

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