Should You Put Your Rental Property in an LLC?

Should you put your rental property into an LLC? In this episode of The Mark You Leave, the James River Law team breaks down one of the most common (and misunderstood) questions for entrepreneurs, real estate investors, and business owners.

Tariq, Alex, and Bri walk through when an LLC does make sense—especially for rental properties—and when it can actually cost you valuable tax benefits and legal protections. From liability shielding and mortgage issues to trusts, multi-member LLCs, and personal residences, this episode gives practical, real-world guidance you can actually use.

If you own rental property, are considering asset protection strategies, or are wondering how LLCs, trusts, and mortgages interact, this episode is a must-listen.

What You’ll Learn

• Why rental properties are considered a business—and what that means for liability
• How an LLC protects personal assets from rental property risk
• Whether you need one LLC per rental property (and smart alternatives)
• What happens if your property has a mortgage
• LLC vs. Trust: which actually provides asset protection (and which doesn’t)
• How married couples should think about LLC ownership in non-community property states
• Why putting your personal residence in an LLC is usually a bad idea
• The hidden tax benefits you could lose by transferring a home into an LLC

Key Takeaways

• Rental properties = business activity, and business activity creates liability
• LLCs are powerful tools—but only when used correctly
• Trusts are great for estate planning, not liability protection
• Mortgages, taxes, and state law matter more than most people realize
• Asset protection is about strategy, not just paperwork

Who This Episode Is For

• Real estate investors
• Entrepreneurs with rental properties
• Business owners thinking about asset protection
• Married couples owning property together
• Anyone considering putting property into an LLC or trust

Resources & Next Steps

📩 Have a question for a future episode? Email podcast@jamesriverlaw.com
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📞 Call to schedule a consultation - (804) 255-9515

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Transcript

SPEAKER_02 0:19

Welcome to the Mark You Leave, our podcast here at James Overlaw, where we discuss and explore the entrepreneur's journey. As always, I'm Tariq, and I'm here with Alex and Bree. Hello. And today we're going to talk about putting your house into an LLC. So to kind of kickstart it here, why would someone want to do that?

SPEAKER_00 0:42

Yeah, it's a good question. And this and this is something that we do a lot here at James River Law. We work with folks who own real estate and who are interested in putting their houses into an LLC. The main reason that they do that is if they have a rental property and they and they, which is a business activity. And so if you are conducting any type of business and there's any liability connected to it, if you're doing that as just as yourself, as a sole proprietorship in your own name, essentially, you are uh have essentially unlimited liability. So if something were to happen, your personal assets are actually at risk. If there's any type of liability associated with your renter or on your on the on the rental property. And so a limited liability company is a great tool for kind of putting a shield up between that business activity of the rental and your personal life and your personal assets. So the most common thing that we see is putting a rental property into a limited liability company to make sure that there is that liability protection there. One of the other sort of lesser reasons is for, you know, for tax purposes, um, it kind of helps organize everything to make, you know, in terms of writing off expenses. Um, but of course, you can do that even if you're running it as a sole proprietorship. But it is important for folks to understand if you have a rental property, you are engaged in commerce. You're, you are, you have a business that you are running. And if the house is in your name and the lease is in your name, um, you are essentially running that business as a sole proprietorship. And so, uh, or or a partnership if you have multiple people that you're own the home with. And so putting the house into a limited liability company is sort of an essential thing to do, really, to protect yourself from any type of liability that can kind of arise from having that rental property.

SPEAKER_01 2:29

Now, what if I'm a business owner and I have multiple rental properties? Am I going to need a separate LLC for each property?

SPEAKER_00 2:36

So, yeah. So there are sort of different uh philosophies on how to do this, but ultimately, yes, uh the highest level of protection comes by having one property in one LLC. And the reason that is, is because if you have two properties in an LLC and something happens on one, well, all of the assets within that LLC are at risk, including that other house. So really having two houses in a single LLC can put both of the houses at risk if something happens in only one of them. Whereas if you had two separate LLCs, then you know anything that happens in one is sort of isolated to that one LLC and the assets within it. That being said, it's that can really add up if you have multiple properties, if you have three, four, five or more properties. And we do have some clients who this is their only business, is they're essentially making money off of rental properties and they might have more time to sort of administer it because every single LLC has to be run like a business in order to get liability protection. So that means they need to have their own bank account. They need to make sure that they're have insurance, that they're really running, that they're observing corporate formalities, that they're actually running like a business. So every LLC that you set up for your house, you really have to think about it as its own little business. And so some people might have time to do all of that, but other people really might not have time. And they have to do a little bit more of a sort of a cost-benefit analysis of whether or not it makes sense to have multiple LLCs. One of the other strategies that we sometimes will look at is if you have maybe you have three properties and two of them are worth $500,000 and you have one that's worth a million or more dollars, you might group, you might put the million-dollar home in one LLC and then put the two $500,000 homes in a set in a second LLC. So you don't have three, but you have two, and you're sort of dividing it up by the total value of the assets. And that's another great way to do it is that you sort of create buckets for your property that are approximately um similar in value. And that way you sort of distribute your risk based on the actual value of the properties and not the individual properties themselves. One other thing to mention is if you own property in multiple states, it can be sometimes a good idea to have LLCs, separate LLCs for that as well. Um but again, an a Virginia LLC can own a property in Florida. So it's no problem if you want to keep everything in one LLC.

SPEAKER_02 5:15

What if you have a mortgage on your property? How does that change things?

SPEAKER_00 5:18

So that that is a little bit tricky because technically when you transfer uh a property into an LLC, um you are you might be violating the terms of your mortgage because typical mortgage note doesn't allow you to just transfer the property to a third party. Um, even though you're the owner of the LLC, that is still technically a third-party transfer. And so you can actually void your mortgage and they could call the note. Now, in reality, I'm not sure how often that's really happening, and most people just ignore it. I think that's a bad idea. I think it's a really bad idea to sort of just breach a contract and leave yourself vulnerable. Um so we we never really advise people to do that. Um, most lenders, though, if you explain what you're doing, if you sort of provide um, you know, the documentation, the draft deed, the operating agreement of the LLC, you can actually write your lender and ask them for permission and get that permission in writing. And most lenders will say, yeah, that's fine. And we help people do that all the time. Um, but we we we never uh transfer property into LLCs without the lender's permission. So that that is a good issue to keep in mind.

SPEAKER_01 6:30

Now I think we get a lot of questions from clients that are wanting to put their house in a trust. So is a tr putting your house in a trust better than an LLC?

SPEAKER_00 6:40

Yeah, and I'll do I think a lot of people do kind of sometimes confuse the two or think that, oh, if I use a trust, uh then that will also give me liability protection and tax relief and all this kind of stuff. And they kind of see trusts as this like magic solution for all these things. But most people, when they're when they're forming trusts, are forming what are called revocable living trusts in in the context of estate planning. And so within estate planning, a revocable living trust is really just a tool to help transfer those assets to avoid probate and do some other things. Um, but it doesn't really provide any asset protection. And the reason is because in the eyes of the government, in the eyes of the courts, the eyes of the IRS, that trust is really not its own separate legal person. It's really just an extension of the grantor of that trust. And so for the most part, most trusts, unless they're irrevocable, which we're not going to really get into, there are a species of trust that might provide some of that. Um, but your general revocable living trust does not provide any asset protection. So if you put your house in a trust and something happens, you still have all the same liability as if you owned it in your own name. Now, what we will sometimes see is people will form an LLC that is owned by their trust and then put the house in that. And that is a good, that is also a good structure where if you have a trust for estate planning purposes and you want it, you ultimately want that house to be in the trust, but it is a rental property, you would you would have an LLC that sort of sits between the that property and the trust and and that acts as that as that shield for for liability protection, but the LLC itself is owned by the trust. So that is a very common structure that we see as well.

SPEAKER_02 8:21

All right. So walk with me. Yes. Say I'm finally in my husband era, a married couple. Uh-huh. Would it make sense for me to then form a multi-member LLC?

SPEAKER_00 8:31

Aaron Powell Yeah. So that's a good question. And and and a lot of um couples do own property together, and there are a lot of benefits when you own your personal residence together. Within L and within an LLC, it's a little bit dependent upon no, it's a lot of bit actually dependent upon where you live. Um some states are what are called community property states where when you uh have when you're married, all everything that you own is sort of considered as like um quote unquote community property. So it's it's like a unified interest, so it's as if you uh as if there's only one owner of that property. Um when you're in a community property state, the IRS sees an LLC that's owned by married um spouses um as disregarded for tax purposes. Unfortunately, like in Virginia and many non-community property states, if you are a married couple and you own an LLC together, the IRS actually sees that as a partnership for tax purposes. So your LLC will have to file a partnership tax return, which can be kind of a burdensome thing to do. Um it's not the end of the world, but it is sort of an unnecessary piece of paper in my mind, um, if you are a married couple. So typically, if you're living in a non-community property state, we advise to just do a single member LLC and then sort of rely on family law to sort of take care of like the joint ownership aspect of it, should you know divorce or any other life circumstance come up. Um, you know, just it would still, as it's acquired during the marriage, it's still considered marital property for family law purposes. Um, but you know, for tax purposes, we strongly recommend folks just do a single-member LLC, although it's just up to them. Some people might still want to do a multi-member for whatever reason.

SPEAKER_01 10:16

Now I feel like liability is just an issue that everybody is worried about. So what if I just want to put my personal residence in an LLC? Can I do that?

SPEAKER_00 10:25

Yes. But should you do that is the question. Um this is something that you know we have heard about people doing, particularly folks that are maybe wealthier, um, just putting everything into a house, uh into an LLC, even even if it's your personal residence. Well, the thing about that is that it doesn't really provide the same level of liability protection as if um as a rental property. And the main reason is because your house is used for personal use. Um and so because this asset within this business is being used for personal use only, um, a court can um pierce the corporate veil, which is a legal concept where the court can actually look through a limited liability company to the owners and say, this limited liability company only serves a purpose. It's really there's no distinction between you personally and the limited liability company because everything that's happening within the business is really just your personal use and it's not a real bona fide business activity. So it would be very difficult to prove to a court that your personal home is also a business that you only benefit from. Um so uh I don't think that there's really liability protection that's there. And on the other side, when you when you have a personal residence, you actually have like some pretty significant um tax and liability protection just by nature of owning the home. Here in the in the US, at least, if you're a United States citizen and you sell a house, as long as you've lived in that house and you've owned that house for uh two two out of the last five years, you can actually get a massive capital gains exclusion. So um if you're an individual person, you have two the first $250,000 of capital gains, profit on your house when you sell it, are excluded from capital gains tax, which is a huge benefit that you lose potentially if you transfer it into an LLC. Same thing for a married couple, they have $500,000 of capital gains that excluded. Um and so uh if you transfer it into LLC, then you you put at risk because the requirements for that exclusion are use and ownership. So like that you use the house personally and that you owned it personally. And so when you transferred into an LLC, that ownership prong is at risk. Now I will say if you are an individual and you uh transferred into a single member LLC, you may be able to maintain that um that deduction, the the capital gains exclusion. Um it's very much uncertain that you can do that if you're a married couple. So it's just not something you really want to mess with. From a liability protection um standpoint, if you're a if you're a married couple and you hold the home by tenants by the entirety, um, that provides a high level of liability protection to the liability of one spouse occur, um, that home would be protected because it's held by tenants by the entirety. Also, in the instance of bankruptcy, whether you're married or not, um, here in Virginia, there's this thing called the homestead exemption exemption that allows you to maintain $50,000 of equity in your house is protected from creditors. And again, you lose that protection if you transfer it into an LLC. So it's a serious trade-off. If you want to try to put your home, your personal residence into an LLC, you lose some of those protections, you lose some of those tax benefits, and you're not really gaining much in terms of liability protection. So we typically um advise people not to do that. Now, there may be instances where you might be using your home as a business as well, and that that's a little bit of a different analysis. If you're running some type of business out of your house, then there may be some reason to do that. But you can also get insurance. There's there are other ways to sort of protect against um liabilities without necessarily putting at risk some of these other benefits that you would get by holding the property in your own name.

SPEAKER_02 14:34

Nice. Well, uh Ruji, have any other questions?

SPEAKER_01 14:38

I think that was all I had. Yeah.

SPEAKER_00 14:39

And if you and if and if you are listening to this and you have questions, if you're thinking about putting your house into an LLC and you're looking for some help, we would love to talk to you. If you just have general questions that you'd like to ask us on the podcast, please send those to uh podcast at JamesRiverlaw.com and we would be happy to answer them on a future episode if we if there are other questions that kind of come up or things that you want us to talk more about, we would love to do that.

SPEAKER_02 15:04

Yeah. If you want to just continue the conversation generally, um feel free to follow us on socials at James River Law. Uh visit our website, JamesRiverlaw.com, stop by our office, give us a call.

SPEAKER_00 15:17

Call first. Yeah. Call first, make an appointment.

SPEAKER_02 15:21

But yes, we'll see you next time.