The following is a post written by Luke Babich, a guest contributor to the DealCheck blog.
Most real estate investors start by buying property as individuals. But there’s more than one way to own and operate rental properties. As your portfolio grows, it might be time to consider two other potential options: trusts and LLCs.
Choosing the right legal structure for you will depend on your financial goals and risk tolerance. Here is what you should keep in mind when deciding between trusts and LLCs as potential ownership entities for your properties.
What Is an LLC?
LLC stands for “Limited Liability Company”, and it is a legal business entity that offers liability protection to its owners and members. In real estate, an LLC can be used to purchase commercial property or a rental property occupied by tenants.
An LLC is one of the easiest ways to separate your personal and business finances. Requirements will vary by state, but you’ll typically need to get an employer identification number (EIN) from the IRS, come up with a name for your LLC, and designate members who are protected under this structure.
An LLC can have just one member, or it can be owned by a group of individuals. LLC members are not typically personally liable for business debts. They also cannot be directly named in lawsuits. Profits and losses usually “pass through” to each member’s personal tax return, thereby avoiding corporate taxes.
The Pros of Using LLCs
The biggest advantage of using an LLC for real estate investments is liability protection. If a disgruntled tenant brings a lawsuit against an LLC, its members’ personal property and assets are not usually at risk.
The ownership structure of an LLC is also flexible. It’s easy to add members, customize profit distribution, and create decision-making systems. Property held by an LLC has a more professional and business-like image than property held by individuals. This can attract investors and ease lenders’ fears.
LLCs are also easier to manage than corporations. There is no restriction on the number of members an LLC can have, so if you are looking to invest with a large group of people, this is a good option to consider.
Investors who use an LLC can also take advantage of certain tax benefits. You don’t need to pay corporate income taxes with an LLC. Instead, you pay taxes at a lower self-employment rate. Talk to a tax professional about how this will affect your specific tax situation, real estate investments, and income from other sources.
The Cons of Using LLCs
As with all types of business entities, LLCs have specific paperwork and forms that need to be filed annually. Each state has its own administrative requirements and may charge annual fees, which may make LLCs more expensive to maintain than a trust. While it’s possible to have an LLC that operates in multiple states, each of those states may have different requirements.
Although an LLC may look more professional on paper, it can be challenging to get financing, especially if your lender has limited experience working with LLCs. Lenders may also invoke a “due-on-sale” clause when a mortgaged property is transferred to an LLC. This is rare but not unheard of.
A final disadvantage of using an LLC is potentially higher taxes. Depending on how the LLC is structured, you may need to pay self-employment tax. In 2025, the self-employment tax rate is 15.3%, which includes both the employee and employer share of Medicare and Social Security taxes. While this is still lower than the corporate tax rate, it is usually more expensive than simply owning a property in your personal name.
What Is a Trust?
A trust is another type of legal entity that’s often used by investors to own rental property. Trusts were specifically designed to simplify the transfer of a property or other assets from one person (called the “grantor”) to another (called the “beneficiary”), when the first person passes away.
There are two main types of trusts: a land trust and a revocable living trust.
A land trust allows a specially-appointed trustee (like an attorney or a trusted individual) to hold the legal title to real estate that you (or your beneficiary) controls and receives income from. Land trusts are a way to maintain the privacy of ownership since the trustee is listed in public records, but you are not.
In a revocable living trust, the grantor puts real estate holdings into a trust but retains control of it while they are alive. Upon their death, assets are transferred to a trustee, who will then manage the assets and eventually transfer them to the beneficiaries of the trust.
The Pros of Land and Revocable Trusts
A trust has less to do with a property’s location or use and more to do with the management of the property. Land trusts and revocable trusts both simplify the transfer of property from one person to another when its owner dies, with a land trust maintaining the grantor’s management and the revocable trust allowing the beneficiary to manage the property immediately.
Trusts are often used to avoid a long, drawn-out probate process upon the death of the grantor. They can also be modified at any time when the grantor is still alive. This simplifies estate planning and increases privacy because the grantor’s name is not part of the public record.
If a grantor becomes incapacitated, a trust ensures the real estate can still be managed without interruption. This type of legal structure allows you to retain complete control while you are alive, while also preparing for the property to be transferred to your beneficiaries.
The Cons of Land and Revocable Trusts
The biggest drawback of a trust is that it does not shield you from personal liability because it is considered a “disregarded entity”. This also means that all income, expenses, and losses are reported directly on the individual’s tax return. Trust income is still fully taxable and doesn’t reduce your overall tax burden.
Trusts also have some administrative complexity. They need to be correctly funded and maintained, and if you don’t have professional help, it’s easy to make mistakes that may nullify the benefits of a trust.
Lenders without specific experience working with trusts may be reluctant to lend to them, or may charge higher rates. If you are working with a realtor to find a property, ask for a list of lenders with specific experience in financing properties purchased by trusts.
Is an LLC or a Trust Better for Rental Properties?
Choosing between an LLC and a trust depends largely on your specific goals. Both have their pros and cons, but the main thing to consider is the purpose of your investment.
Trusts are most often used when an investor wants to pass real estate on to their heirs or beneficiaries without paying inheritance taxes and avoiding a lengthy probate process. LLCs are more commonly used to protect investors from personal liability or to buy real estate with other investors.
If you are selling a house and want to reinvest the funds into rental properties, an LLC might be a better choice. You will be protected from personal liability as you manage your rentals and can take on partners or investors who will also be protected from liability.
If you are an investor who is looking to retire and have less hands-on involvement in your portfolio, a trust is a good option. This ensures a smooth transfer of ownership to your heirs and offers some inheritance tax protection, depending on your state. Only five states currently impose an inheritance tax on trusts.
Get the Best of Both Worlds
One way experienced investors take advantage of the benefits of both structures is to own investment real estate in an LLC and set up a trust that owns the LLC. This provides liability protection through the LLC and also incorporates estate planning through the trust.
Both of these entities will need to be properly set up and managed to be effective. Consult a financial advisor or real estate attorney to ensure you have set up everything correctly for both your LLC and the trust.
Luke Babich is a licensed real estate agent and is the co-founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions.
