The Nest

NestApple's Real Estate Blog

Featuring real estate articles and information to help real estate buyers and sellers. The Nest features writings from Georges Benoliel and other real estate professionals. Georges is the Co-Founder of NestApple and has been working as an active real estate investor for over a decade.

Shall I own a rental property under my name or under an LLC in NYC real estate?

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Do you need an LLC for a rental property? In this blog, we will analyze the benefits of setting up an LLC in NYC real estate. We will go over the common issues about thisLLC for real estate - title ownership structure. In the past, you probably have rented an apartment. You probably noticed that the management company or landlord asked to send out checks to a company rather than an individual landlord. Usually, it’s followed up by an LLC, and of course, it’s not random.

More and more landlords are getting an LLC for their rental property. Putting together this simple structure can make a huge difference in how landlords operate as well as on their tax bill. If you own your rental property, you might have been thinking about it. We will go over an analysis of using LLCs for rental investment. 

What does LLC stand for?

An LLC stands for Limited Liability Company. It’s a legal entity on its own. One or more people can own this structure. Owning an LLC entails that you have your rental investment as a separate entity from yourself. Owning an LLC can also have tax consequences. Owning an LLC can be formed as a sole proprietorship or joint partnership. 

Do I need to buy a rental property via an LLC in NYC real estate?

If you own a rental property under your name, you may be wondering whether having it under an LLC is a better option. Nowadays, LLC’s are advantages of LLC for real estate in New Yorkbecoming the standard business format for landlords. However, it’s not mandatory at all to own an investment property in an LLC. However, it offers the following advantages:

Separation of assets

If an accident happens in the unit, and your tenant decides to sue you, the LLC will separate this property from your assets. Another example if the bank or the IRS seizes your assets, this LLC creates a separation in court and mitigates the risks. If you own various rental properties under your name, you expose yourself to more significant risks. Tenants or creditors can sue you directly rather than the LLC’s that you created. This mistake can lead to massive losses across your assets.

If you manage several multiple rental units

Having several LLCs limits your liability. This structure protects the properties from being held liable altogether. If one unit goes bankrupt, it insulates this property from the rest. This structure limits the risk of potential losses at the level of each property.

Liability reduction

When you own assets vis an LLC, people cannot sue you directly. Instead, they can only sue the LLC. If the LLC carries a mortgage, the only exposure and liability are limited to the equity in that LLC. The responsibility of the LLC is “limited,” and they can’t reach you.

Taxes benefits

Because of the LLC, you get the benefit of pass-through taxation. LLCs make it easier to deduct business expenses. LLC’s are separate entities that make it easier for you to determine the earnings and profitability of the investment.

Use of new services

You can receive rents through credit card payments or e-payments. You are eligible to apply for a business credit card and benefit from those generous offers when opening accounts. Remember, it is not mandatory. We recommend our clients do it because we think it’s a smart move for your rental property, but nothing is saying that you have to make this move.  

Can I create an LLC for my property if I already have a mortgage for my rental investment?

Yes, but it can make things messy. You need to contact your bank to ask if you can transfer the property title to the LLC. The bank may not approveLLC- for new york real estate the transfer to the LLC or change the terms of the mortgage. If you are planning to initiate this transfer, you need to speak with your tax specialist and accountant.

Am I allowed to buy a house under an LLC and rent to myself?

We do not recommend clients to initiate this structure. Even if it sometimes may make financial sense, there’s a caveat. This self-rental structure often represents a red flag for the IRS. The IRA name that “phantom income.” It typically designates a tax gain not yet been realized through a cash sale or a distribution. This montage can complicate the process of tax planning. This structure makes your tax revenues more challenging to follow. However, there are exceptions when that structure makes sense, but be ready to face an IRS audit!

How to create an LLC and then transfer a mortgage to the LLC?

Your accountant needs to file the proper paperwork with the state. You need to come up with the right name for your company and explain how itpros and cons of setting up an LLC works:

  1. To start, contact your bank to ask out how to transfer the mortgage’s title from the individual to the LLC. Some lenders won’t approve it. Others will give you the requirements for the assignment.
  2. Come up with a name and draft the Articles of Organization (AOC) for the LLC. The AOC is a document that details the structure and explains to the authorities how the LLC is structured.
  3. If you live in a “Notice of Intent” state such as New York, we recommend filing a notice of intent. This document states you are creating an LLC.
  4. Next, you will need to file all the licenses for your LLC.
  5. Finally, you can file for an LLC. The paperwork can cost anywhere from $100 to $1000, depending on the location.
  6. Then administratively, you need to transfer the ownership to the LLC. You also need to create a new bank account in the name of the LLC. This separate account will make the accounting & tax process easier once a year.
  7. Finally, you need to update your leases. Tenants will sign a new lease with the LLC and make their checks payable to the LLC.

How much does an LLC in NYC real estate cost to set up and run?

Anywhere from $100 to over $1000 to set up depending on the location. IT will also cost about the same to pay annually to keep the LLC in place and file the paperwork.

In what case shall I create an LLC for rental units?

We recommend our clients to get financing for their LLC when they close on a rental property. Transferring the title of the property and the mortgagehow to create an LLC: the 5 steps in the middle of the mortgage can be a painful exercise. In various cases, it makes a lot of sense to own rental properties via individual LLC’s:

  • Suppose you are just starting to invest, the sooner, the better. It is an excellent habit to take.
  • If you buy a second property and are expanding, each property needs its LLC.
  • If you want to renovate, hire staff LLCs to make the hiring process more manageable and streamlines the accounting process under each umbrella.
  • A lawsuit can get you to spend a lot of money and go bankrupt. At the opposite, having your losses limited to the LLC equity can be beneficial. You can lose your rental property, but it’s not the end of the world. In the case of a litigation, getting an LLC is the safest way to protect yourself. 

Are there instances when an LLC in NYC real estate is a bad idea?

We do not recommend forming an LLC if the goal is only to rent from yourself. This only raises red flags with the IRS.

Conclusion about LLC in NYC real estate

Generally, forming an LLC for a rental property is a smart idea as it limits your liability. Nevertheless, it can be expensive to set up. Therefore, at NestApple, we think the benefits of an LLC vastly outway the pitfalls. Their most significant strength is separating assets to help alleviate tax burden and liability, but they also can act as a convenient way to keep finances separate. If you aren’t sure whether it’s for you or need help setting one up, contact a tax professional or an LLC creation company. They can help!



Written By: Georges Benoliel

Georges has been working in Wall Street for the last 16 years trading derivatives with hedge funds. He has been an active real estate investor for over a decade. Georges graduated from HEC Business School in Paris and holds a master in Finance from ESADE Barcelona.

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