Over 10 million Americans are landlords, which is only approximately 7% of the population. In such tough economic times, it’s difficult to buy your own house, much less multiple to rent out.
If you’re lucky enough to be a landlord, then you’ll want to protect your investments. They make you a decent passive income, after all.
One option to consider is transferring your property to a business, such as a limited liability company (LLC). What can happen if you take this route though, and it is a smart move? Here are the tax consequences of transferring property to an LLC.
Why Transfer Property to an LLC?
Doing extra paperwork isn’t fun, so why even transfer your rental property to an LLC in the first place?
Well, for one, an LLC for rental property gives your venture a more professional image. Not only can this attract more renters, but it can also generate more investor interest. As a result, you be able to grow your company fast.
More importantly, this business structure offers you limited personal liability. You can rest easy knowing that any legal actions tenants take won’t affect your personal assets or income.
In addition, it reduces or eliminates some taxes you’d otherwise have to pay as a traditional landlord. There are corporation taxes if you opt for a C-corporation or S-corporation, but not with LLCs. And if you want your loved ones to inherit your property, then they can bypass inheritance and estate taxes by being fellow LLC members.
Tax Consequences of Transferring Property to an LLC
Now that you know what the benefits are of transferring property to an LLC, you might be interested in taking the next step. If you don’t even have an LLC yet, then you can get set up quickly with our business registration service.
The good news is that if you have a single-member LLC, things are pretty straightforward. If you’re the owner of both the LLC and the property, then you won’t have tax consequences since you’re not changing the title.
However, if you’re dealing with a multi-member LLC, or you’re adding one to your LLC, the situation becomes more complicated. Below are the tax consequences of adding a name to a deed (or changing it).
Capital Gains Tax
If the property being transferred has appreciated in value, you might be subject to capital gains tax. On the other hand, if it’s depreciated in value, you’ll benefit from depreciation on your tax return.
This tax is the difference between the property’s fair market value when you transferred it and its adjusted basis. The adjusted basis is usually the original purchase price, although if there are any improvements, depreciation, or other factors affecting its value, this will affect the adjusted basis amount.
Do note that there are both state and federal capital gains taxes. The latter can be as high as 50% if you’re a high earner.
Typically, this tax is realized right at the time of transfer. So before you do so, it’s wise to consult with a tax professional. They’ll be able to figure out if there will be any taxable gains.
Something to consider is a 1031 exchange. In a nutshell, you’ll be able to defer capital gains, and it’s a tax break. However, it’s a complicated process, so again, a tax professional can advise you on what’s ideal for you.
Depreciation
As we’ve mentioned earlier, you can claim depreciation deductions if the property being transferred is depreciable. The LLC can deduct a portion of the property’s value as an expense each year, which can reduce taxable income and lower your company’s tax liability.
Unfortunately, the rules and methods regarding this subject are complex. We highly advise that you seek a tax professional’s advice and guidance.
Transfer Taxes
Generally speaking, you won’t have any transfer taxes if you transfer a mortgage to an LLC. But some jurisdictions impose them on the transfer of real property since they consider it a sale, even if there’s no exchange of money. For example, you may be hit with real estate transfer taxes or stamp duties.
These transfer taxes are usually assessed as a percentage of the property’s value. The exact numbers will depend on where the property’s located and what it’s worth.
Make sure you research and understand the transfer tax implications in your specific jurisdiction before you make any moves.
Property Taxes
Transferring property to an LLC may impact property tax liabilities. This is because the assessment of property tax often varies depending on the ownership structure and use of the property.
For instance, if you use the property for commercial reasons, then you’ll be subject to different tax rates or assessments than if you use the property for residential purposes. Some jurisdictions may also give you tax breaks or incentives for certain types of property or uses.
Payroll Taxes
Does your LLC have employees? Then you’ll have to pay payroll taxes. Not only does this incur more expenses, but it’s significantly more work too.
You’ll have to withhold employee taxes from their paychecks, such as:
- Federal income
- Social Security
- Medicare
Then, you’ll have to pay their share of some payroll taxes. These typically include matching Social Security and Medicare taxes, federal and state unemployment taxes (FUTA and SUTA), and in some cases, additional state and/or local taxes.
Keep in mind that you’ll have to do this regularly, such as quarterly or annually. On top of that, you’ll have other annual forms to file with the IIRS, such as Forms W-2 and 1099.
Is Transferring Property to an LLC Right for You?
Now, you’re properly informed about the tax consequences of transferring property to an LLC. We’ve only provided general information, so it’s your responsibility to find out the specific laws and regulations in your area, and to fully understand the details of your situation.
If you’ve done your research and have determined that transferring your property to an LLC is the right decision, then make sure you’re working with experienced professionals. This can help you avoid stress later on.
Sign up with Business Anywhere if you want to form an LLC. We can also be your registered agent to save you time and effort.
