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Ask Dave

Incorporate for Rental Houses?

Joe doesn't really need to set up a corporation for his rental properties, when an LLC would be the better option.

QUESTION: Joe recently got married and had two rental houses before they got married.  Now they have three rental houses and he wants to put them in both names.  Should they do that?  Should they form a corporation?

ANSWER: I would not use a corporation because you cannot have passive income in a Sub S Corporation – and owning rental property is passive income.  You should set up an LLC.

You could put all three rentals in one LLC.  Then, if someone is injured on any of your properties and they get a settlement larger than your liability insurance, they can only take the rental property.  Your personal assets are protected because it creates a corporate veil.

The attorney who sets up the LLC will help you move the properties into the LLC under both yours and your wife’s name.  You’ll most likely do a quit-claim deed and it will not affect your mortgages.  However, you will need to let the mortgage company know or else they’ll call the loan due.

I would also suggest you pick up a liability umbrella – $1 million or $2 million attached to the top of your existing coverage.  It’s inexpensive and gives you good asset protection.