Can I put my rental property into an LLC in Minnesota?

It's a pretty common way that you can protect your rental property and protect your personal assets by using an LLC. Clients will come to me having purchased a second property, maybe a cabin or a vacation home that they plan on renting out, they would love to use it year-round, but they live somewhere else that kids go to school. They just want to rent out the property. And one of the first questions they ask is, What should I do with that? Should I just keep it in my name, or is there something else I can do?

One of the easiest ways to protect yourself with that rental property is to create an LLC. We're going to talk about three different ways that creating the LLC can help you:

  • Asset protection
  • Ease of transfer of the property
  • Tax benefits

Protection of Your Personal Assets

The first main benefit of putting that rental property in an LLC can be protecting your personal assets. If an LLC owns a property, that limits the liability of the property owner if it gets sued to the assets of the LLC. For example, if you own it in your personal name, and something happens on the property, the person who's going to sue the property owners is going to sue you individually. If they do that, your personal home and your personal assets are on the line. However, if it's an LLC that owns the property, and they go to sue you personally, you can go to court and say, "Wait a second. I'm not the one who owns the property. The LLC owns the property. That's the person who needs to be sued."

It can also be used to protect your privacy for that same reason. People don't know that you own the property so people aren't trying to sue you or attach that property. Let's say you're in a separate car accident, and the person in the car accident attempts to sue you and sue for your personal assets. And they say wait a second, I'm pretty sure that that person has a rental property, they have a nice vacation home. I'm going to go after that vacation home. Well, the court will say that's not their asset. The LLC owns that vacation home. And plus, they're not going to know it's your vacation home unless you put a name on it like John Smith LLC.

So a lot of my clients will do 123 Main Street LLC, use the address, use some identifier, don't put your name on the LLC, and that'll give you a little extra privacy. We can also use it this way if you're a celebrity or if you're somebody who has name recognition and you don't want all of your personal business out there. So if we purchase property and we put it in an LLC, and somebody is trying to figure out where you live, your home address is not going to show up, because when they search for your name, they won't find your address. They would have to somehow find the LLC first to be able to find the address.

Ease of Transfer of Assets

The second reason to use an LLC is for the ease of transfer of the property. If the property is owned by the LLC, and you need to transfer ownership to somebody else, you don't actually have to go to your county and file new real estate documents, you don't have to go through the full process that we have to go through when we buy and sell the property. Instead what you're doing is transferring the LLC interests from one person to another. It's a much more informal process and much easier to do. All you have to do is transfer that membership and this is where it's important to make sure you have the right LLC agreement and have all of your paperwork in place to make this a seamless transition. If you're looking at a family vacation home, this is a great way to keep it in the family. Instead of having to go through a probate court or deal with estate plans, the LLC can simply pass that interest down to the next generation. So the next generation owns the LLC. 

Tax Benefits

The final way an LLC can help with your rental property is the tax benefits. Quick disclaimer: I'm not an accountant, so you need to talk to your accountant about how you can structure this property the best way for you.

However, if you're owning it personally and you're receiving rent, it's going in and out of your personal bank account. You're creating a paper trail and you may be creating a tax liability for yourself. However, if you have an LLC, all the rental income will go into the LLC itself. You can use that money for expenses for upkeep on the property for other LLC expenses that you wouldn't have to you don't have to be charged for on your taxes. Plus, it's a lot easier on your personal tax returns to not have to declare all that extra income from the rental property on the side. The LLC will be responsible for obviously this will create another taxable event for you in that the LLC has to have their tax returns filed, but trust me when you separate the personal from the LLC on the rental property, you'll find it's a very clear, straightforward way to do things.

If you're ready to move your rental property into an LLC, the smart way to do it is to work with your accountant, work with a financial advisor, work with your attorney, and get an LLC set up so you can get all of these benefits for owning your rental property without all the headaches of having personal liability on the line. If you need help with this, let's set up a Legal Strategy Session. It's a very easy next step to just move your properties into an LLC, but the long-term consequences whether it be estate planning, tax preservation, protecting your personal assets, or transferring it to another generation are huge benefits you can get by putting that rental property into an LLC.

Andrew Ayers
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I work with business and estate planning clients to craft legal solutions to protect their legacies.