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Lucy, Esq.
Lucy, Esq., Attorney
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My husband and I live in Virgina. However, we own two rental

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My husband and I live in Virgina. However, we own two rental properties - one in Washington, DC and another in Seattle, WA. We have not created an LLC or anything like this for the purposes of holding these properties. We report the income/expenses for these properties on our joint individual income tax return (Federal and state). What would be the advantages or disadvantages (if any) from a legal and tax perspective of creating an LLC to hold these properties, and flowing all of the income/expenses through this LLC instead of the way we are doing it now? The properties both have mortgages on them, held in our names.
Hi,

My name is XXXXX XXXXX I'd be happy to answer your questions today.

The primary benefit to establishing an LLC is that if something happens and you or your husband are sued personally (such as in a car accident), assets held in an LLC cannot be taken to pay your personal debt. Similarly, if someone is injured on the property and obtains a judgment, they would not be able to take your personal assets. This is one reason that people set up LLCs.

In some cases, an LLC may also lead to reduced tax liability for the money received as income from those properties. That's the other benefit.

To receive these protections, there are filing fees - the LLC would have to be registered in both areas where you have properties. You have to keep very careful records of everything and keep the LLC entirely separate from your personal affairs. There can be annual fees, and there may be costs associated with drafting and filing the articles of organization. An LLC also cannot represent itself in court, so you may have to hire an attorney if you needed to evict a tenant. However, if you're living in Virginia renting out a property in WA, you may already be doing that (or intend to, if necessary).

If you have any questions or concerns about what I've written, please reply so that I may address them. It's important to me that you are 100% satisfied with the service I provide. Otherwise, please rate my service positively so that I get credit for answering your question. Thank you.
Customer: replied 3 years ago.

Thanks for your reply. That makes sense. I know you're not a tax accountant, but can you explain a little more about how putting the properties into an LLC could possibly reduce our tax exposure? I suppose that depends on the corporate tax rate in our area vs individual income tax rates?


 


Our expenses on the properties, at the current time, are fairly high relative to the income on the properties (i.e. the mortgages eat up most of the revenue). However, as the years go on, this ratio will change as the mortgages get paid off, and the rent goes up.


 


When you report the income/expenses for the two properties on the individual income tax return, I believe there are some limitations on offsetting the expenses of one property against the revenue of the other - they are treated as separate entities. Might an LLC solve this problem since if they're one business entity all of the income and expenses are "bundled" as one corporate entity?

Taxes depend on your specific financial situation, so it's best to sit down with someone who can review your documents. Generally, though, reduced taxes are one thing people consider when deciding whether to have an LLC.

Without seeing all of the documents involved, it's difficult to comment on how having the LLC own both properties would impact any losses on your tax returns. But any lawyer that is going to set it up will be able to look and explain whether incorporating will benefit you.

Another thing to be aware of is that you would have to transfer the properties from your name to the LLC's name, so you may want to consider the costs of recording new deeds in the counties where these properties are located when you are filing your decision.
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