I hear it again and again. You should start an LLC (Limited Liability Company) for the tax benefits. You should put a rental property under an LLC for the tax benefits.
Let’s talk about the tax benefits of having your rental property or business owned and operated by a Single Member LLC (SMLLC). The cost of setting up the LLC can be a valid tax deduction (if set up prior to activity or in service date special rules may apply). The annual costs of having and maintaining the LLC can be a tax deduction.

For the tax returns I have prepared (many), I can use the fingers on one hand to count the number of landlords with properties in SMLLCs (or more often pretend they do, since they often never transfer ownership) who receive any legal tax benefit beyond that. And I don’t need to use any fingers or a thumb. Because the number is zero. Same for business activity that would be a sole proprietorship if a SMLLC was not established.

Since your tax deduction for the LLC costs will be less than the LLC costs, you spend more money than you receive in tax benefits.

Is it possible for a SMLLC to have a tax benefit at the state level? I suppose since I don’t have all state tax laws memorized, but I haven’t seen one yet. But I have seen SMLLCs cause more taxation in states that have an excise tax or business tax on them.

Title 26 Code of Federal Regulations Section 301.7701-3(b) states that a single owner entity is disregarded. It is ignored for federal income tax purposes. From a tax perspective it doesn’t exist. And in most states, they follow that and those that don’t typically add in some taxes.

A SMLLC DOES NOT CHANGE WHAT IS DEDUCTIBLE AND WHAT IS NOT DEDUCTIBLE. YOU DO NOT MAGICALLY GET MORE DEDUCTIONS FOR THE SAME ACTIVITY.

THE SINGLE MEMBER LLC DOES NOT CHANGE THE NATURE OF THE ACTIVITY. If it is passive activity without the SMLLC, then it is passive activity with the SMLLC. If you can’t “offset” your W-2 income with passive losses before you have a SMLLC, then you can’t offset the W-2 income after you have a SMLLC for the same activity.

There are good reasons to establish a Single Member LLC. Changing the bottom line of your tax return is not likely to be one of them.

But what about a Multi-member LLC or an S-corp? We’ll get to those in Part B and Part C.