Are landlords considered business owners?
Although there is some debate about what constitutes a "business," the most common definition is what the IRS uses for tax purposes. In general, as long as you rent the property to earn a profit and work at it regularly and continuously, it will be considered a business. To determine whether a rental property is a business, the IRS looks at several factors:
- Is the property commercial or residential?
- How many properties do you own?
- How much involvement do you have with the property on a day-to-day basis?
- Are there any ancillary services provided under the lease?
- Is the lease involved long-term or short-term?
- Have you filed all required information returns?
The bar is pretty low for the IRS to determine that your rental property is a business venture. You can even be considered a business owner if you hire someone else to do most of the hands-on work at your rental property.
The other alternative is that your rental property is more of an investment than a business. For the property to be considered an investment, you would not work at it regularly or continuously. It may, however, earn you a profit.
Why form a separate business entity for my rental property?
As someone who owns rental properties, if you do nothing from a legal perspective to operate your business, then you are automatically considered a sole proprietor. That means that nothing is separating you from your business. You file an additional schedule on your taxes to report income, but otherwise, there is nothing extra from a legal standpoint that you do to run your rental property.
Running a rental property through a sole proprietorship is definitely the easiest legal form that you can create. However, it is not the safest. If something goes wrong with your property, including situations where you are sued or have to deal with an outstanding unpaid bill, your personal assets are at risk.
For example, imagine that your renter has a visitor in their home. They have an unstable stair that they recently reported to you, but you have not had a chance to fix it or send someone over to look at it. Their guest walks on the stair, it breaks, and your guest falls through the step, resulting in injuries to their legs.
In this example, if you have a sole proprietorship, the renter's guest may be able to sue you directly for their injuries. If you have to pay for their damages and you don't have the money, they can garnish your bank accounts and wages. They can also seize your personal assets, including any other rental properties you own.
If you create a legal entity that owns your rental property, the only asset at risk is whatever that new entity owns—often just the rental property or a bank account where rental deposits are held. Having a separate legal entity for your business, then, protects your own personal assets. This is what the term "limited liability" means.
What kind of business entity makes sense for a rental property?
There are several options for business entities that you can use to protect yourself as a landlord. Creating a limited liability company, or LLC, is one of the most common entities chosen for rental property businesses.
An LLC combines some of the most beneficial aspects of a sole proprietorship and a corporation. It does not require as many formalities to keep it up and running as a corporation would, especially if you have just one owner. It also gives you limited liability, which protects your personal assets if something goes wrong at your rental property.
There are circumstances where an LLC might not be the best option for a landlord. You should speak with a lawyer about your unique legal situation to determine which choice might be the best for you.
Can I live in a property owned by my LLC?
Technically, you can live in a property that your LLC owns. However, you run the risk of voiding the protections that your single-member LLC creates in some situations.
The IRS will also limit the number of deductions you can take for rental expenses if you live in your rental property. In general, you are considered living in a rental property if you use the property for the greater of either 14 days in the calendar year or 10% of the total days you rent it to others at a fair rental price.
If you are considering creating an LLC and then moving your property into it, you should talk to a lawyer about how this will change your legal protections and affect your taxes. For fast, affordable, and simple business formation services, choose Rocket Lawyer to answer your questions and handle all of your paperwork and filing. Rocket Lawyer also provides legal documents for all of your rental property needs, including Tenant Screening documents, Leases, and Eviction Notices. All documents are legal in your state.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.