Should landlords use an LLC for their rental property?

If you're a real estate investor, you’ve probably run into the grey area around how rental income is classified. Is your rental operation technically a business in the eyes of the IRS? It depends.

On one hand, most long-term rentals are considered "passive" investments. However, once short-term rental owners start materially participating in the maintenance and upkeep of their property like a hotel, that becomes an active business and is treated differently.

Any investor needs to understand which tax status fits their particular situation, but a common question landlords of all types often ask themselves is: "should I set up an LLC for my rental property?" Or in other words, should they formally register the rental operation as a business, separate from their personal income?

Ask most people and they would say yes – but not for the reason some might expect. Forming an LLC is not a magic wand investors can wave to reduce their overall taxes, but it does act as a protective legal shield for rental properties and provides a simple structure for keeping income, expenses, and liability organized and legally distinct.

Of course, every landlord is different, and you should consult with a CPA before you make your decision. This is not tax or legal advice, but we can walk through what exactly an LLC is and how it can benefit landlords if managed properly.

What is an LLC?

An LLC (limited liability company) is a legal business structure that separates your personal assets from your rental property investments. When you form an LLC to hold your rental properties, the company owns the real estate, not you.

Think of it as creating a legal barrier between your personal finances and your rental business. If someone sues over an incident at your rental property, they're suing the LLC, not you directly. Your personal bank accounts, home, and other assets get an extra layer of protection.

LLCs are often misunderstood in that they don't actually change the way your income is taxed. If you make a set amount of income through your rentals and you owe 24% of that to the IRS, for example, an LLC doesn't suddenly change that.

However, they do legally separate your rental operation from your personal assets. The more rental properties you have, the more tenants you are legally liable for. Shifting your business into an LLC – whether that be a separate one for each property or as one large company – keeps the rest of your assets protected if something goes wrong.

How does an LLC work for a rental property?

When you create an LLC for your rental property, you're essentially building a separate legal entity that owns and operates your real estate. You become a member of the LLC rather than the direct owner of the property.

Here's how it typically works: You transfer ownership of your rental property to the LLC through a deed. The LLC's name appears on the property title, lease agreements, and any related documents. You manage the property through the LLC, collecting rent, paying expenses, and handling maintenance all under the company's name.

The LLC operates with its own bank account and financial records, completely separate from your personal finances. This separation is what creates the liability shield. When someone has a claim against the property, they can only go after the LLC's assets, not your personal wealth.

For single member LLCs (the most common structure for individual landlords), you still maintain full control over your property. You make all the decisions, just through the company structure instead of in your personal capacity. The day-to-day management doesn't change much, but the legal protections do.

Tax benefits of forming an LLC

The tax situation with LLCs for rental properties often surprises landlords. Many assume forming an LLC will unlock significant tax savings, but the reality is more nuanced.

According to Amanda Han, CPA at Keystone, "There are typically not a significant amount of tax benefits for LLCs when it comes to landlords. You get the same deductions regardless of whether you hold your rentals in an LLC or in your personal name."

Standard rental property deductions remain available whether you use an LLC or not. This includes mortgage interest, property taxes, insurance premiums, repairs, maintenance, property management fees, and depreciation. Your home office expenses, software subscriptions, and marketing costs are also deductible in both scenarios.

However, there is one notable exception. Han explains, "Under current law, if your rental property has taxable rental income after taking write-offs and depreciation, only the property in an LLC taxed as a partnership could allow the entity to potentially pay for your personal share of state taxes on your behalf. The benefit of this is that it turns a personal expense into a legitimate business deduction."

It's also worth noting that rental income isn't subject to self-employment taxes either way, so the S-corporation strategy that saves money for active businesses doesn't apply here. The bottom line: most landlords form LLCs primarily for liability protection, not tax savings.

Legal advantages of forming an LLC

Limited liability protection stands as the primary benefit. Kevin Kim, Partner and Department Head of Corporate and Securities at Fortra Law, emphasizes this point: "LLCs are a good idea to protect the investor from liability. Absent fraud or alter-ego treatment, LLCs extend limited liability to the assets it owns and shields the individual members from personal liability."

This protection means if someone gets injured on your rental property and wins a lawsuit, they typically can only access the LLC's assets (like the property itself) rather than your personal savings, primary residence, or other investments. For landlords with significant personal assets to protect, this peace of mind is invaluable.

Professional credibility also comes with LLC ownership. Having an LLC structure can make you appear more established and serious to tenants, vendors, and financial institutions. Some landlords find it easier to separate their business and personal finances with an LLC framework.

Kim notes that "in general, it is considered a best practice. Limited liability is ideal in these situations, and financing is not much harder with an entity."

Forming an LLC is not complete protection from liability in the case of injury, and landlords need to take the utmost care when managing their properties. They should also invest in landlord insurance to protect themselves further; Steadily offers coverage for legal liability for when unexpected claims or lawsuits occur.

‍

Disadvantages of forming an LLC for your rental

While there are many advantages, it's important to know the drawbacks that do exist.

For one, forming an LLC costs money. It requires filing fees that vary by state, typically ranging from $50 to $500. You'll also face annual fees or franchise taxes to maintain the LLC, plus potential costs for registered agent services and legal assistance.

Administrative requirements add ongoing work; you need to keep clean records and make sure not to mix your rental income with your personal finances. Landlords must keep separate bank accounts, keep detailed financial records, file annual reports, and observe corporate formalities to properly manage the LLC and maintain maximum protection. If you're depositing rental income into the same bank account you pay your personal credit card with, for example, a court could use that as an reason to lay the fault on you, not your business.

Kim warns: "If a third party cannot differentiate between the entity and the individual owner, then the entity's limited liability veil could be pierced."

Financing can become more complicated. Some lenders prefer not to work with LLCs or may offer less favorable terms. You might need to personally guarantee loans anyway, which partially defeats the liability protection purpose. Transferring an existing mortgaged property into an LLC can also trigger a due-on-sale clause, though this rarely happens in practice.

The liability shield isn't absolute. If you personally guarantee a loan or lease, you remain personally liable for those obligations regardless of the LLC. Personal negligence isn't protected either; if you personally cause harm or break the law, the LLC won't shield you from consequences.

If you manage just one or two properties, forming an LLC may not be worth the cost or hassle, especially if your involvement is limited. But while it's important to know the drawbacks, the benefits do outweigh the costs for most landlords.

These types of landlords may want to consider an umbrella insurance policy instead. Umbrella policies increase the amount of coverage for landlord policies that often max out at a certain amount (often around $1 million), as well as increasing liability coverage.

You can read our guide on umbrella insurance policies vs LLC for rental properties to learn more.

LLCs by state

State-specific rules create variability. Some states impose higher fees, franchise taxes, or more stringent reporting requirements on LLCs. Kim explains: "Certain states have more business-friendly treatment than others. Some are more business friendly because the state's courts are more business friendly, for example Delaware. Others are because the state's secretary of state insulates the entities from being easily searched or investigated, for example Wyoming."

However, he cautions: "It is important to note that this is a commonly misunderstood item. If the business activities of the state in which you are operating in mandates foreign registration in that state, then it may not be as beneficial going to these haven states because you will be subject to the local jurisdiction's laws and policies."

Maintaining proper LLC formalities requires discipline and organization. You can't casually mix personal and business expenses, you need to maintain proper documentation, and you must follow your state's ongoing compliance requirements. For casual landlords with a single property, this administrative burden may outweigh the benefits.

‍

Read more: How the 'Big Beautiful Bill' impacts landlords

Should each rental property have its own LLC?

One of the most common questions landlords ask about LLCs is whether to hold each property in a separate LLC or group multiple properties together.

The separate LLC approach offers maximum liability protection. If something happens at one property, only that property's LLC (and its assets) are at risk. Your other properties remain protected in their own separate LLCs. This structure works particularly well for high-value properties or those with higher liability risks. Having one property per LLC can also simplify loan underwriting and keep each property's finances clearly separated.

However, multiple LLCs multiply the costs and administrative work. You'll pay formation fees, annual fees, and maintain separate books for each entity. For landlords with numerous properties, these costs add up quickly.

The grouped approach makes more sense for certain situations. Kim explains: "Smaller properties like SFRs and condos often pursue multiple properties per entity, and this aids in portfolio financing."

Many landlords find a middle ground: grouping similar properties in the same geographic area under one LLC, while separating properties with different risk profiles or in different states. For example, you might have one LLC for your three single-family homes in the same city and a separate LLC for a commercial property in another state.

Your financing strategy also plays a role. Portfolio loans and blanket mortgages become easier when multiple properties sit under one LLC. If you plan to scale your portfolio aggressively, grouping properties can streamline your operations without creating excessive legal entities.

Again, be sure to consult with a CPA or lawyer before setting up your LLC(s).

How to set up LLC for rental property

The formation process for a rental property LLC follows similar steps across most states, though specific requirements and costs vary by location.

First, choose a unique name for your LLC that complies with your state's naming requirements. Most states require the name to include "Limited Liability Company" or an abbreviation like "LLC" or "L.L.C." You'll need to check that no other business in your state already uses that name.

Next, file articles of organization with your state's business filing office (usually the Secretary of State). This document includes basic information like your LLC's name, address, registered agent, and member names. Filing fees typically range from $50 to $500 depending on your state.

Designate a registered agent who can receive legal documents on behalf of your LLC. This must be a person or company with a physical address in your state. You can serve as your own registered agent, hire a professional service, or ask an attorney.

Create an operating agreement that outlines how your LLC will operate. While not required in every state, this internal document proves crucial for establishing that your LLC is a legitimate separate entity. It details member rights, profit distribution, management structure, and procedures for major decisions.

Obtain an Employer Identification Number (EIN) from the IRS, even if you don't have employees. You'll need this to open a business bank account and file taxes. The application is free and can be completed online in minutes.

Open a dedicated business bank account for your LLC. This separation of finances is critical for maintaining the corporate veil. All rental income should go into this account, and all property expenses should be paid from it.

Transfer your property into the LLC by filing a new deed with your county recorder's office. If you have a mortgage on the property, check with your lender first, as this transfer could technically trigger the due-on-sale clause (though most lenders don't enforce this for transfers to single-member LLCs).

Update your insurance policies to reflect the LLC as the property owner. Get a new landlord insurance policy in the LLC's name, or endorse your existing policy if your insurer allows it.

Finally, maintain your LLC through annual requirements. Most states require annual reports or franchise tax filings. Keep meticulous records, maintain separate finances, and observe corporate formalities to preserve your liability protection.

‍

So, should I form an LLC for my rental property?

The decision to form an LLC for your rental property depends on your specific situation, risk tolerance, and business goals.

An LLC makes the most sense if you have significant personal assets to protect beyond your rental property. If losing your rental property in a lawsuit would hurt but losing your life savings would be devastating, an LLC provides worthwhile protection. The cost and hassle become more justifiable as your personal wealth grows.

Kim reinforces this perspective, recommending LLCs broadly: "In general, it is considered a best practice. Limited liability is ideal in these situations, and financing is not much harder with an entity. Highly recommended."

Multiple properties strengthen the case for an LLC. The protection value increases with more properties at risk, and you can spread the formation and maintenance costs across your portfolio. If you're serious about building a rental property business rather than just owning one or two properties, an LLC helps establish the right foundation.

Properties with higher liability risks particularly benefit from LLC protection. Older buildings, properties with pools or other attractive nuisances, or rentals in litigious areas present greater lawsuit risks. Short-term rentals also carry additional liability concerns due to frequent tenant turnover.

However, an LLC might not be worth it if you own just one lower-value rental property with a small mortgage. The annual costs and administrative burden could exceed the practical benefit, especially if you already carry robust landlord insurance. Some landlords find that adequate insurance coverage provides sufficient protection without the LLC complexity.

New landlords still building their portfolio might wait on LLC formation. If you're just getting started and don't have substantial personal assets yet, you could begin with good insurance coverage and form an LLC later as your wealth grows. This staged approach lets you master landlording basics before adding entity management to your responsibilities.

States with high LLC fees also influence the calculation. If your state charges $500 annually just to maintain an LLC, the cost-benefit analysis shifts compared to states with minimal fees.

Ultimately, the LLC decision balances protection, cost, and complexity. Most established landlords with multiple properties or significant assets find the protection worth the cost and hassle. But there's no universal answer—your personal situation determines whether an LLC for rental property makes sense for you. Consider consulting with both a real estate attorney and a CPA who can evaluate your specific circumstances and provide personalized guidance.