Should I title my vacation rental under an LLC? Vacation rental homeowners want to know if creating an LLC for rental property is beneficial and worth the effort involved. As an experienced property management company with a Senior Director of Business Development who has a strong background in finance, Georgia Cabins for YOU is here to help! Let’s define LLC, talk about the advantages and disadvantages of an LLC for vacation rentals, chat about retitling consequences, learn more about liability insurance, and see if putting your rental property under an LLC is right for YOU.
Note: real estate investing involves many variables unique to your situation. While we can offer educated ideas and potential paths, please consult with a local, licensed attorney and/or accounting professional before making any legal or financial decisions for your vacation rental business.
What Is an LLC?
An LLC — a limited liability company — is a business structure that can help guard against financial issues that often come with owning/running a business. As a vacation rental homeowner, forming a business entity for your rental property can help protect you from personal liability not covered by insurance. Plus, a single-member LLC is taxed similarly to a sole proprietorship.
Forming an LLC for Rental Property
You can easily set up your own LLC for real estate by yourself or with a partner or group. Anyone who owns an LLC is considered a “member” of that LLC. Forming an LLC for rental property differs by state, so it’s important to look into state-specific costs, permit requirements, etc. before you start an LLC. Another important note is to create a separate bank account for your LLC to keep personal expenses and business expenses apart.
Vacation property homeowner or not, all LLCs require a registered agent — a person/entity who can accept official government correspondence, regulatory summons, or service of a court during normal business hours.
While you can name yourself or another member of the LLC as the registered agent, we recommend using a reputable commercial registered agent instead. Typically, their fees are reasonable, and it takes the weight off your shoulders!
Advantages of an LLC for Rental Property
Since you can name your LLC basically anything you want, and any related property titles will display your LLC name as the owner name, searches for your property on county or state property sites won’t reveal your personal name — giving you more privacy as a rental property owner.
While this sense of anonymity can be quite alluring for homeowners, it’s important to note that determined individuals can search the corresponding Secretary of State site for public information on your LLC, which often includes your name and any other member names.
Protecting yourself from a personal lawsuit is another benefit of creating an LLC for your rental property. Simply put, if anyone throws a lawsuit at you regarding your vacation home, only its assets would be at risk. So, you wouldn’t need to worry about everything else you own, which would be super relieving under those circumstances.
For instance, let’s say one of your guests trips down the porch steps at your rental property, goes to the ER, has a few tests and X-rays, and ends up needing a wrist splint and major pain killers. They could use a personal injury attorney to sue you for pain and suffering. Thank heavens, you titled your rental under an LLC, so the only assets in jeopardy are within the LLC. Your other investments and personal assets are safe!
Avoid Double Taxation
Pass-through taxation is a huge tax benefit for most individual-owned rental LLCs. In a nutshell, any generated vacation rental income as the business owner will pass through to your personal tax return. This means you won’t be taxed for your “company profit” and taxed again for your “owner profit” — aka double taxation — minimizing the amount of taxes on your income.
With that said, it’s still important to hire a local CPA to help set up quarterly tax payments to avoid hidden fees and submit annual tax returns properly. And if you’ve never had an LLC, it’s important to learn about the right IRS forms: 1040, 1065, 1140, K1, plus Schedules C, E & F.
Disadvantages of an LLC for Rental Property
As with any legal setup, creating an LLC for rental property costs money. Since laws and regulations vary by state, it’s important to hire a good local attorney. Attorney fees for setting up a vacation rental LLC typically start at $99. They will apply for your EIN (Employer Identification Number), create LLC operating agreements, and file appropriately.
Keep in mind if your rental property resides in a different state than where you live, you’ll need to determine in which state to file your LLC. You could form a rental property LLC in the state where your vacation rental is located. Or you could form an LLC in your home state. However, you may need to qualify for intrastate business, which means additional state taxes and laws may apply.
For homeowners of multiple vacation rentals, if you’re creating a separate LLC for each rental property you own, it could become even more complicated and expensive.
Taxes & Fees
While there are some tax advantages when forming an LLC for rental property, it ultimately costs more to file and pay taxes correctly. Check with your accountant on miscellaneous taxes and annual fees related to LLCs before creating a property rental LLC. Some states even have excise tax, franchise tax, intangible property tax, and filing fees…to name a few.
Retitling YOUR Rental Property to an LLC
Converting the ownership of your rental property to an LLC is a relatively easy process with a well-drafted quitclaim deed. Though, retitling your rental property to an LLC is not without potential consequences.
Before leaping head first, it’s vital to speak with your lender if you financed your rental property’s purchase. There may be preferential underwriting or interest rates for personal buyers that would need to be amended before transferring the deed. It’s also possible your lender could require you to pay the loan in full before retitling, which could mean refinancing or paying a heap of cash out of pocket. And sometimes…it’s just not worth it.
Consequences of Retitling Rental Property
- Increased Mortgage Rate — Purchasing a vacation home as an individual often helps rental property owners qualify for lower mortgage rates. Once you transfer your rental property to your business LLC, it’s highly like your mortgage rate will increase…instead of your vacation rental profit.
- Higher Insurance Costs — Transferring the ownership of your rental property to a business means your insurance company could require you to change from a personal insurance policy to a commercial policy. While highly recommended regardless to cover structure, contents, liability, and loss of income, it comes at a higher cost.
- Tax Impact — Moving rental property under an LLC can incur a delayed tax consequence and/or trigger a tax event for any partnered homeowners of the property. Speaking with a licensed CPA can help you understand and prepare for any adverse tax effects when retitling rental property.
Purchasing short-term rental insurance to cover acts of nature, vandalism, and loss of income may be a no-brainer, but oftentimes, vacation rental homeowners forget to add liability protection. Insurance claims for accidents, injuries, and even sickness as vacation rentals happen all the time, so it’s important to protect your investment properly.
To cover a wide variety of claims that could occur, we recommend purchasing liability coverage of at least $1 million. And if you have a private pool, other luxury amenities, or a very large rental, $2 million may be more beneficial. It’s equally important to lower your risk of liability lawsuits.
Should YOU Create an LLC for Rental Property?
Weighing the pros and cons, you’ll find most vacation rental homeowners opt out of creating an LLC for rental property. With sufficient liability insurance, most rentals don’t really benefit from using an LLC.
On the flip side, if you own multiple properties, want to limit personal or other business exposure, and/or have higher-risk liability issues (i.e. an indoor pool, an outdoor boat dock, or other areas prone to accidents), forming an LLC for your rental property may be a good option.
Of course, reaching out for professional advice from your financial planner, CPA, and/or attorney is your best bet to see if titling your vacation rental under an LLC is right for you and your investment property.
Managing YOUR Vacation Rental Business
Further your property investment goals with a professional vacation rental management team. At Georgia Cabins for YOU, we take care of every detail so you don’t have to worry about late-night calls, housekeeping, maintenance, finance, marketing, etc. When you partner with Georgia CFY, you’ll also be assigned a personal owner representative who becomes your in-house advocate to ensure every decision made pushes your property to succeed and rake in the revenue. Whether you titled your rental property under an LLC or not, we’ll help you the rest of the way!
Get a rental estimate online or reach out at 1.800.580.5524 to speak with Georgia Cabins for YOU directly.