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.
Do you need a limited liability company (LLC) for a rental property in New York City? This blog will analyze the benefits of establishing an LLC in NYC real estate. We will go over the common issues about this ownership structure. In the past, you probably rented an apartment. You probably noticed that the management company or landlord asked to send checks to a company rather than an individual landlord. Usually, it’s followed up by an LLC; of course, it’s not random. We will discuss the benefits of owning real estate in an LLC. More and more landlords are getting an LLC for their rental property. This simple structure can significantly affect how landlords operate and their tax bills. 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.
An LLC stands for Limited Liability Company, and it’s a legal business entity ruled by a written LLC operating agreement.
One or more people can own this structure.
Owning real estate in an LLC entails that you have your rental investment as a separate entity from yourself. This type of ownership can also have tax consequences.
Therefore, owning an LLC can be a sole proprietorship or joint partnership.
If you own a rental property under your name, you may wonder whether having it under an LLC is a better option. Nowadays, LLC in NYC real estate is becoming 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:
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 approve the transfer to the LLC or change the mortgage terms.Interest rates are usually higher for most lenders when facing an LLC vs. an individual borrower.
If you plan to initiate this transfer, you need to speak with your tax specialist and accountant.
We do not recommend clients 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 realized through a cash sale or a distribution.
This montage can complicate the process of tax planning, and 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!
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 it works. An attorney is in charge of filing articles of organization and will provide you with an affidavit of publication.
Depending on the location, anywhere from $100 to over $1000 to set up. IT will also cost about the same to pay annually to keep the LLC in NY and file the paperwork.
We recommend our clients get financing for their LLC when they close on a rental property. Transferring the title of the property and the mortgage 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 LLCs:
We do not recommend forming an LLC if the goal is only to rent from yourself, which only raises red flags with the IRS. The IRS can requalify the cash flows of this real estate transaction into income.
Generally, forming an LLC in NYC real estate for a rental property is a bright 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!