Ownership of Rental Properties

This article will look at the various types of entities for rental property ownership. Below, you’ll see that different entities have their disadvantages and advantages. In any case, the general aim in each case is to limit liability and safety-guard your real estate from unsecured creditors.

TIP: To form any of the entities presented below, the applicable registration form and fee must be filed with the Washington Secretary of State’s office. These forms are available at: Washington Entity Registration.

TIP: Consult with a Federal Way certified public accountant or tax attorney prior to establishing an entity and transferring ownership of your rental property. This Guide isn’t 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 more common and simplest 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 advantage here is that this is straightforward and simple, for one it doesn’t require the filing of any complicated paperwork or pay any heavy filing fees. The main disadvantage to this type of ownership is that your creditors could force a sale of the rental property if they can attain a court judgment against you, or force you into an involuntary bankruptcy.

Legal Entity Ownership

General partnerships, limited liability companies, and corporations are all legal entities. 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 property, considering that you do not own it. The general partnership is the only type of entity that does not require registration with the Secretary of State. As far as taxes are concerned, the entity type chosen doesn’t matter a whole lot because in most cases, income from the rental property “passes through” from the entity and is taxed on a personal tax return (but see the cautionary note under corporations). See the article entitled Necessary Tax Forms for Reporting Rental Activity, which is included in this Guide, for more details on just 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 business for profit. In a general partnership, each partner has equal management rights, but is personally liable for the debts of this partnership. And as regards that liability, a general partnership is in most cases not recommended.

Limited partnership. This entity is more complex than a general partnership as it requires both a limited partner and one general partner. The general partner has sole management rights, coupled with personal liability for any resulting debts. Whereas, the limited partner is not personally liable for debts of the partnership and additionally is without management rights. This entity selection is generally not recommended.

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 entity’s debts, that is, unless the debts result from your own wrongdoing. This form of ownership is preferred as it reduces liability and reveals fewer formalities than those of the corporation.

Corporations. This form of ownership offers you limited liability and also allows for perpetual existence. Although this mode of ownership requires the upholding of particular formalities for you to maintain this limited liability status. Thus for this reason that LLPs or LLCs are commonly more suitable to your aims. Also worthy of mentioning is that corporations are categorized as either s-corporation or c-corporation. When a corporate entity is taxed as a c-corp, it will pay tax on rental income, and then you will pay tax (again) when the corporation pays dividends. And it’s more desirable to avoid the double-taxation trap whenever it is possible.

Federal Way Accountant +John Huddleston is a prolific writer of tax and finance articles. He holds two post graduate degrees from the University of Washington School of Law.