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Lately DW has been talking about wanting to form an LLC that would own our rental properties. If we go through with this plan, what would be the tax implications?

Bottom line - there are none. Your income and deductions will be exactly the same. And depending on how exactly you own the LLC, you might not even change you federal tax return filing.

There is no federal tax form for LLCs. They always file as some other kind of entity. If the LLC has a single member, the default is for the LLC to be ignored for tax purposes and the single member files whatever form would have been filed had the LLC not existed at all. In your case, it sounds like you would just keep filing your schedule E.

If the LLC has more than one member (like you and your wife), the default is for the LLC to file as a partnership. That would entail preparing another tax return - Form 1065. Then the net income from the partnership flows through to your personal return.

In either case, the LLC can elect to be taxed like a corporation. And if it does that, it can also elect "S" status. That would switch the filing to Form 1120 (or 1120S for an S Corp). The S Corp would get you to the same place as the partnership - the net income (or loss) would flow through to your individual return. But if you don't make the S election and remain a C corp, the corp would pay any taxes on it's net income. Any net losses would be trapped in the corp and wouldn't reduce your personal taxes. Further, C corps don't get a favorable tax rate on long-term capital gains. So if (or when) you sell a property, the corp is going to pay more tax than you would.

It should be clear at this point that for rental properties, the C corp option is not usually a good choice. Other than that, there really aren't a whole lot of differences in the choices.

Personally, I would stick with the default options of being ignored or a partnership. I don't see a benefit in the corporation options.

--Peter <== not in SC, so can't comment on the state issues
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