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Should Rental Property be in an LLC or Trust?

Max Smith

Reading Time: 5 minutes

Your property is an asset for you, but is it secured from your liabilities? You have two options for a solution: an LLC and a trust. But should rental property be in an LLC or trust? 

You can protect your home from liability with the help of an LLC or trust. In this act, you can buy a property under the name of your LLC or a trust. Both have their own facilities, benefits, and working processes. 

A trust is mainly helpful for securely transferring property to an heir. At the same time, an LLC provides ultimate liability protection and forms a business. 

Do you want to know in depth? Then let’s explore!

The answer lies in analyzing the benefits and drawbacks of both (LLC and trust). Let’s examine them below.

LLC Benefits

Below are some of the key benefits that can affect buying property in a trust or LLC.

  • Liability Protection

LLCs are great if you own rental properties. Suppose someone ever tries to sue your rental property. In that case, the LLC protects your finances, such as your savings, home, and other personal assets. In this way, the LLC is a barrier to separating your rental business from your personal life.

  • Tax Efficiency

With an LLC, the company’s profits and losses are just passed through to your tax return. The LLC itself doesn’t have to pay income tax, so you can easily file your taxes as a business owner with an LLC.

  • Commercial Property

An LLC is a unique business entity that can protect you from legal issues with your tenants. If you own commercial real estate directly, one of your tenants may target you for the property. 

But by setting up a real estate LLC to hold the commercial property, you can keep your savings and other assets separate and safe from any legal actions your tenants take.

  • Costs

Usually, you must pay filing fees and annual report fees of between $75 and $250 each year. So, maintaining an LLC involves upfront costs and ongoing expenses. However, you must be prepared to pay a yearly fee to keep the LLC in good standing.

Some Disadvantages of Putting a Rental Property in an LLC

Here are the drawbacks to consider.

  • Complexity in Multiple Ownership

Setting up an LLC can be pretty straightforward, but it may get more complicated if your property has multiple owners.

  • Additional Taxation

You may have to pay more or double taxes if you still need to correctly complete the taxation form from your state’s LLC register office.

So, should I put my property in a trust or LLC? Below are the pros and cons of having a trust to help you decide whether to put your rental property in a trust or LLC.

Putting a Rental Property in a Trust

Holding rental properties within a trust can be a helpful option. Here are some key benefits:

  • Appointing Multiple Owners

If you have a rental property with more than one owner, it can be wise to put the property into a real estate trust. This will allow you to document a clear and detailed record of the property’s ownership percentage. 

Additionally, this document can be very helpful, especially if there are any questions or disagreements about the property later.

  • Estate Planning

A trust is best to ensure your assets and property are correctly transferred to your family when you’re gone. The trust can also include clear instructions for how that property should be managed in the future without going through the complicated legal process called probate. 

Furthermore, it simplifies the whole process and saves on taxes. That’s why trusts are such a helpful tool for estate planning.

  • Anonymity

A trust allows you to keep ownership and financial details private. So, if you own a property through a trust, your name won’t be publicly recorded as the owner. This can help keep your identity as the owner hidden from the public.

Some Disadvantages of Putting a Rental Property in a Trust

Let’s also see the drawbacks below.

  • Tax Complexity

A trust doesn’t provide any particular tax advantages, like pass-through taxation. However, it can help minimize estate taxes when transferring assets.

  • Increased Costs

You must pay a lawyer to manage your legal documents and transfer your assets into the trust. This legal expertise comes with a price tag. Moreover, it is generally more expensive due to the legal complexities involved. 

However, buying rental property in trust or LLC depends on what you seek. You can analyze LLCs and trusts’ features, benefits, and risks to make a decision. But do you know what you can really do? If you want to find a better option, read our next section.

Should I Put My Home in a Trust or LLC?

First, consider several factors, including your specific goals, preferences, and circumstances. An LLC may suit you if your primary concern is protecting your assets from potential liabilities.

On the other hand, if you focus on estate planning and ensuring a smooth transfer of your home to your children, placing your home in a trust may be the better choice.

Buying rental property in a trust or LLC is not mandatory. There is another option! You can set the LLC under a trust. Yes, it’s possible!

Combining an LLC and a trust can be your best option for obtaining comprehensive benefits, providing liability protection, and estate planning advantages. Undoubtedly, there are many benefits of a trust owning an LLC.

Conclusion

In the end, should rental property be in an LLC or trust? When you choose the best option for property protection and smooth transfer to your family, there will be a debate on family LLC vs. trust.

You can choose an LLC, a trust, or a combination. It’s entirely up to your situation and goals. Both structures offer distinct benefits and drawbacks.

However, the right choice depends on your priorities regarding liability protection, tax efficiency, estate planning, and privacy. Lastly, get the help of an expert online service provider to make an informed decision.

Key Points

Here are the key points:

  • A corporation is a type of business structure. Its owners are called shareholders.
  • An ‘LLC’ is a business structure that has its own legal value. Its owners are called members.
  • Difference between LLC and Corporation in Texas:
    • Formation: To form an LLC, file a Certificate of Formation with the state. To create a corporation, file Articles of Incorporation with the state.
    • Management: LLCs are member-managed or manager-managed. In corporations, shareholders elect a board of directors, which appoints officers.
    • Taxation: LLCs can be treated as pass-through entities or corporations. C corporations are subject to double taxation, but S corporations are taxed as pass-through entities.
    • Compliance: LLCs are less obligated while maintaining formalities, whereas corporations are strictly obligated.

Frequently Asked Questions

It’s 100% legal to put your property in an LLC or trust. However, every state has its rules to follow. So check with your state officials to know the requirements and then apply for an LLC or a trust to put your rental property in it. 

Can a trust own an LLC?

Yes! It’s legal for a trust to own an LLC. In fact, it’s a suitable option for investors or property owners like you to secure the property and transfer the process to the heir. You can also take it as a combination of both an LLC and a trust.

Should I put rental property in a trust or LLC?

Of course! You can put your rental property in an LLC or trust. However, you must follow the formal procedure, pay the necessary fees, and obtain legal status for your LLC. On the contrary, if you create a trust, get a lawyer for legal procedures and contract with a trustee. However, you can also get a combination of both an LLC and a trust. It is safe for your property to be protected from liabilities and transferred to your heir when the time comes.

Max Smith - LLC Formation

He is a seasoned entrepreneur and legal expert at LLC Formation Hub. With a stellar track record in both business and law, Max simplifies the complexities of LLCs. His practical insights, featured on LLC Formation Hub, empower entrepreneurs across the USA. Max merges business finesse with legal acuity to guide businesses toward success.


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