Rental Property Ownership

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

When forming an entity, you’ll need to visit SOS.WA.GOV to register.

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

Individual Ownership

This form of ownership is the more common and the most straight forward method of ownership and occurs when you purchase the rental property in your 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, for one it doesn’t require you to file any complicated paperwork or pay any lofty filing fees. The big disadvantage to this kind of ownership is that your creditors are able to force a sale of the rental property if they receive a court judgment against you, or compel you into involuntary bankruptcy.

Legal Entity Ownership

General partnerships, limited liability companies, and corporations are all legal entities. The differences between these entities are important and outlined below. The major advantage to entity ownership is that your personal creditors are unable to force a sale of the rental property, given 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 tremendous amount because in most cases, rental income “passes through” from the entity and is taxed on a personal tax return (but see the cautionary note under corporations). Cover the article titled Necessary Tax Forms for Reporting Rental Activity, included in this Guide, for more on how rental income is taxed.

General partnership. This form of ownership takes place when two or more persons co-own a for profit business. Now with a general partnership the partners have equal management privileges, but also each partner is personally liable for any incurring debts of the partnership. And thereby a general partnership is most often not preferred.

Limited partnership. This entity is more complex than the general partnership as it requires both one limited partner and one general partner. The general partner has sole management rights, and personal liability for any resultant debts. Whereas, the limited partner isn’t personally liable for debts of the partnership and at the same time is without management rights.

Limited liability partnership/company. A limited liability partnership and a limited liability company are quite similar entities, both provide for limited liability to partners/members. This would mean that you will not be personally liable for the debts of the entity, that is unless the debt is caused by your own wrongdoing. This form of ownership is often preferable because of limited liability and additionally there are not as many formalities that require observance than with corporations.

Corporations. This form of ownership delivers limited liability and allows for perpetual existence. Although they also require the maintenance of special formalities so that you can maintain the limited liability status. So under this reasoning that LLPs or LLCs are generally more suiting to your goals. Also worthy of noting is that corporations fall under one of two types: c-corporation or s-corporation. When a corporation is taxed as a c-corporation, it pays tax on rental income, and then you will pay tax (again) when the c-corp pays dividends. And it’s preferable to side-step the double-taxation trap whenever possible.

Tax Accountant +John Huddleston has written extensively on the subjects of taxes and accounting. He is a graduate of the University of Washington’s School of Law, with a Juris Doctorate and a Masters in Tax Law.