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How A Trust Can Protect Your Rental Property

Buying, building or owning a rental property is often a good way to create passive income. Because California property values tend to rise significantly over time, this can be a wise investment. However, with the benefits of additional income come additional risks. What if someone gets injured on your rental property and you’re sued by your tenants? An LLC is an excellent way to hold your rental property and manage your risk.

How The LLC Works

An LLC is a limited liability company created to own your rental properties. The LLC is the only responsible party for issues that may occur with the rental units. This means if someone is injured on one of your rental properties, and you are sued, the liability is limited to your LLC, instead of potentially having your personal assets be at risk.

Your revocable living trust will be the owner/member of your LLC. This ensures that if something happens to you, your family can still manage the LLC and the rental property without having to go to probate court.

Creating an LLC is often a wise move if you have multiple rentals or even if you simply rent out a space as an Airbnb. You will want to discuss with your attorney whether or not to include all of your rental properties in one LLC or whether you should create a separate LLC for each one. By setting up separate LLCs for each rental property you insulate each property individually. This means if a lawsuit is filed against one of your rental properties it will not include or negatively affect the other rentals you have.

4 Things To Consider When Creating An LLC For Rental Properties

  1. If you currently own a rental property with someone else, both of you will need to be members of the LLC to avoid a reassessment of property tax.
  2. A second consideration is your income tax. Generally, net income that is generated by an LLC will pass through to you so that you do not get taxed first on the business earnings and then a second time on the income you receive from the rentals. However, this requires good accounting and bookkeeping skills either on your part or on the part of your accountant. This is an additional task and expense of maintaining an LLC.
  3. California LLC’s are taxed at a flat rate of $800 per LLC by the Franchise Tax Board. You should consider whether this annual tax payment will be a burden for you as it is due every year that your LLC operates.
  4. Setting up a trust-owned LLC for your rental property requires that you change the way your rental agreements are worded. The landlord for your rental properties should be your LLC and not you individually.

The best thing to do is to speak with an attorney who works with rental properties, trusts and taxation issues. At Norton Basu LLP, we have counseled many of our clients on this issue. We’d love to hear from you and can be reached by phone at 408-520-1712 or via email.