Tax Benefits of Using an LLC for Your Rental Property

A limited liability company (LLC) does not provide inherent federal tax benefits for rental property ownership. Rental income, deductions and depreciation are generally treated the same whether property is held personally or through an LLC. Even so, the legal structure of an LLC can influence how certain tax rules apply when you own and manage rental property.

A financial advisor can help guide you through both setup and long-term strategy to ensure you make the most of these benefits.

Does an LLC Offer Tax Benefits for Rental Properties?

An LLC does not change how rental income is taxed at the federal level. Its primary role is legal, not tax-related. In most cases, owning rental property through an LLC produces the same federal tax outcome as owning it personally. Keeping this in mind, here are five tax-related benefits that can apply when using an LLC to hold rental property.

1. Pass-Through Taxation

Pass-through taxation means rental income is reported on the owner’s personal tax return rather than taxed at the entity level. This treatment applies to rental property regardless of whether it is held in an LLC or owned individually. LLCs avoid entity-level taxation only when compared to C corporations, which are rarely used for holding rental real estate. Pass-through taxation does not reduce taxes; it simply determines where income is reported.

2. Qualified Business Income (QBI) Deduction

The Qualified Business Income (QBI) deduction allows eligible taxpayers to deduct up to 20% of qualified business income. This deduction is not dependent on having an LLC. Rental income may qualify only if the activity rises to the level of a trade or business, generally requiring significant services similar to hotel or short-term rental operations. If rental income qualifies for QBI, it may also be subject to self-employment taxes, which can offset or exceed the benefit of the deduction. This deduction was originally set to expire in 2025 but was extended indefinitely by the One Big Beautiful Bill Act (OBBBA).

3. Flexibility

LLCs offer flexibility in management and profit allocation. This flexibility is legal and contractual, not tax-driven. Profit and loss allocations that differ from ownership percentages are permitted only if explicitly stated in the operating agreement and respected in practice. This feature can be useful for multi-owner arrangements but does not create additional tax advantages on its own.

4. Retirement Contributions

LLC owners may be eligible to contribute to retirement plans only if rental income is treated as nonpassive earned income, which generally requires the activity to qualify as a trade or business and may trigger self-employment taxes. Most landlords aim to avoid this classification. Simply owning rental property through an LLC does not allow retirement contributions.

5. Deductible Losses and Expense Allocation

Rental property owners may deduct ordinary and necessary expenses, such as repairs, management fees, insurance, interest and depreciation. These deductions apply whether or not the property is owned through an LLC. Passive activity loss rules apply in both cases. An LLC does not expand or limit available deductions.

Other Benefits

Beyond tax benefits, LLCs do provide legal liability protection. By separating personal and business assets, an LLC shields owners from personal liability related to the rental property, assuming corporate formalities are followed. LLCs may also improve organization and professionalism when dealing with tenants, partners or lenders.

How to Set Up an LLC for Your Rental Properties

A multi-family apartment building with private terraces.

Forming an LLC for your real estate investments involves more than just picking a name, it requires planning and attention to legal details. Here are the general steps to help guide you through the process:

Choose the right state. Most rental property LLCs are formed in the state where the property is located. Forming in another state usually requires foreign registration and added fees.
File the articles of organization. The next step is filing the Articles of Organization with the secretary of state in your chosen state. This document includes essential details about your LLC, such as its name, address and the names of its members. You will also need to pay a filing fee, which varies by state.
Create an Operating Agreement. An operating agreement details the ownership arrangement and operational guidelines for your LLC. Although it may not be legally mandated, it’s often beneficial to have one. This document helps avert conflicts among members and establishes a clear framework for how the LLC will function.
Obtain an EIN. An employer identification number (EIN) is necessary for tax purposes and can be obtained from the IRS. You’ll also need to register for any required state taxes. Having an EIN also allows you to open a business bank account, which is vital for keeping personal and business finances separate.
Transfer Property Titles to the LLC. Lastly, you can transfer property titles into the LLC. This process involves executing a deed to transfer ownership from your name to the LLC.

Alternatives to LLCs for Rental Properties

A sole proprietorship is another way to own and operate rental property. It does not require forming a separate legal entity, which can simplify setup and ongoing administration. This structure does not provide liability protection, and its federal tax reporting is the same as a single-member LLC. Rental income and expenses are reported directly on the owner’s personal tax return, without a separate business tax filing.

An additional ownership option is holding rental property in a trust. Trusts are commonly used for estate planning rather than tax purposes and can help define how properties are managed and transferred after the owner’s death. This structure can support continuity of management and provide clearer direction for heirs.

Drawbacks of Owning Rental Properties Through LLCs

Using an LLC to hold rental properties offers benefits, but it also comes with potential drawbacks. One of the primary concerns is the added complexity and cost. Forming an LLC requires filing legal paperwork and paying registration fees, which vary by state. Ongoing costs such as annual report fees and possible franchise taxes can also add up, making LLC ownership more expensive and cumbersome than personal ownership.

LLC ownership also adds administrative responsibilities tied to maintaining a separate legal entity. This includes using separate bank accounts and keeping clear financial records, which is also true for any business structure, but an LLC requires closer attention to formalities. These requirements can take time and may lead some owners to hire accounting or legal help, increasing overall costs.

Financing can also be more complex in certain situations. Some lenders evaluate loans differently when a property is held in an LLC, which may involve additional documentation or personal guarantees from the owner. In many cases, especially for single-member LLCs, approval is still based largely on the owner’s credit and financial profile, but the process can be less streamlined than financing a property held in an individual’s name.

If your LLC has multiple members, internal conflicts can also arise. Disagreements over decision-making, profit sharing or long-term strategy can strain partnerships and disrupt operations. While a strong operating agreement helps reduce these risks, legal disputes may still occur and require costly resolution.

How LLC Ownership Impacts Estate and Succession Planning

Holding rental properties in an LLC can simplify how assets transfer to heirs and help protect them during estate settlement. Instead of passing each property individually, you can transfer ownership through membership interests in the LLC. This allows for a smoother transition and avoids the delays and costs of probate. It can also make managing multiple properties easier for successors who take over operations.

An LLC also offers flexibility for gifting and estate tax planning. You can gradually transfer ownership shares to heirs using the annual gift tax exclusion or apply part of your lifetime exemption. This approach can reduce the taxable value of your estate while maintaining control over how the business operates. For families with several heirs or complex holdings, these transfers can be structured to balance control, equity, and tax efficiency.

An operating agreement becomes particularly important in an estate context. It can specify who inherits management responsibilities, how profits are distributed, and what happens if a member dies or becomes incapacitated. Clear terms in the agreement help minimize disputes and provide stability for family members who may not be directly involved in the business.

For larger estates, an LLC can also work alongside trusts or family limited partnerships. These structures provide an added layer of control and privacy, while helping manage estate taxes and protect assets from future creditors. By coordinating with an estate planning attorney and tax professional, property owners can use an LLC as a key tool to preserve wealth and support long-term family succession goals.

Bottom Line

A for rent sign sits outside of a single family home owned by a real estate investor.

An LLC does not provide inherent federal tax benefits for rental property ownership. Rental income, deductions and depreciation are generally treated the same whether property is held personally or through an LLC. Although an LLC does not create tax benefits on its own, its legal structure can shape how some tax rules apply to rental property ownership and management.

Tax Tips for Real Estate Investors

A financial advisor with tax expertise can potentially help you optimize your real estate portfolio’s tax efficiency. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
A 1031 exchange is a tax-deferral strategy used in real estate that allows an investor to defer paying capital gains taxes on an investment property when it is sold, as long as another similar property is purchased with the profit gained by the sale. This provision, named after Section 1031 of the IRS code, encourages real estate investment by allowing investors to reinvest the full amount of their sale into new properties, effectively shifting the tax obligation forward in time.