24 Oct Buying a rental home with friends

Q. We want to buy an investment home with friends. How do we handle ownership and the expenses?
— Friend

A. Investment properties can be lucrative, but they can also be a headache.

We’re glad you want to make sure you do it right.

A very popular form of ownership for an investment property is a Limited Liability Company, or LLC, said Brian Power, a certified financial planner with Gateway Advisory, LLC in Westfield.

Power said an LLC offers insulation from personal asset risk exposure as well as relatively easy tax reporting.

“If you personally own an investment property and someone is injured on that property, it is quite possible that the owners would be named in any lawsuit resulting from the incident,” Power said. “If the rental property was owned by an LLC, the owner’s risk exposure would be insulated by the protection of the company, leaving only the assets owned by the LLC exposed to a potential lawsuit.”

Another advantage of an LLC is the owners’ ability to enjoy the benefits of pass-through taxation, Power said. As a result, income and capital gains from the LLC pass through directly to the owner, who would only have to pay taxes as an individual.

That’s a big difference from C corporations, which, in contrast, are subject to double taxation — once at the corporate level and again when dividends are distributed to shareholders, he said.

Multimember LLCs also enjoy the benefits of pass-through taxation as the LLC passes its profits and losses through to its members, who report their portion of the LLC’s business income or losses on either a Schedule C, K or Form 1065 with their individual income tax returns, Power said.

“This means that both single member and multimember LLCs offer the benefits of pass-through taxation of profits and losses and limited liability and personal protection for the owners,” he said.

He said opening a checking account in the name of the LLC would be the easiest way to handle expenses and divvy up net profits from the rental property.

“All investors should come up with a certain amount of money to seed the checking account,” he said. “This seed money can be the start of a sinking fund in case any repairs need to happen before the property starts to accumulate profits.”

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This post was first published in October 2016.