If you own real property that you rent out to a tenant, whether it’s a residential rental or a commercial space, you might want to consider forming an LLC to hold your building. Being a landlord is an unpredictable business. If someone slips and falls on your property, you could end up in litigation. I presume that you have insurance in place to protect you from that kind of liability. I also recommend to all of my clients who are landlords that they place the rental property into an LLC. It is not a perfect solution, but it limits the claims of LLC creditors to the LLC assets and protects your other assets (such as your home and business) from those creditors.

There are a few things for you to consider if you are thinking about an LLC to hold your rental property. First, the limitation on liability is not perfect. If you were personally responsible for doing something, such as snow removal, and you didn’t do it and that omission lead to an injury, you would still potentially be on the hook as the person responsible for that job, and not merely as the land owner. An LLC does limit your contractual liability to the extent that the contract is between the LLC and the other party and is not guaranteed by you.

Second, if you structure your LLC with only one owner (or it qualifies as community property), it will not have to file its own tax returns. It can be a Schedule C on your personal tax return, which is how I presume you report your income and losses from the property now. If your LLC has two owners, such as a husband and wife couple, then it will have to file a separate partnership tax return. If the owners are a married couple and one of them is the LLC owner, the other can receive the LLC membership by right of survivorship if the first owner dies. The bottom line is that a multiple-member LLC has to file its own tax return. For a married couple to avoid this requirement, they will have to be comfortable with one of them owning that LLC with right of survivorship to the other.

Third, in order for your LLC to provide the limited liability generally afforded by the LLC entity, you need to treat the LLC as separate from you. The LLC must have its own bank account; you cannot buy groceries for personal consumption from the LLC’s bank account; and the LLC should enter into contracts, not the owner individually – just to give you a few examples.

Finally, your mortgage holder may not be too happy about you transferring ownership of the real property to the LLC. Most mortgages have a "due on sale" clause, which requires the mortgage to be paid in full if the property is sold. Transferring the real property into an LLC almost certainly qualifies as a "sale" under the terms of the mortgage. My clients sometimes renegotiate new mortgages when forming LLCs for rental properties. At other times, they do the transfer and hope that the mortgage holder doesn’t "catch" them. The risk in transferring the real property to an LLC without the lender’s permission is that the lender could at any time after the transfer call the loan due because the transfer violated the due on sale clause. This calling of the loan due would mean that it had to be paid in full or refinanced. It could be at the time the lender called the loan due interests rates could be much higher than they are now, so there is a risk that the homeowner could get stuck with a much more expensive loan later. In addition, the homeowner’s personal circumstances may have changed for the worse making it nearly impossible to borrow the money needed to pay off the lender. How you handle this problem will be up to you and your comfort level with the choices you face.