Rental income taxed through an LLC depends on how you choose to classify the LLC for tax purposes — and that choice is yours to make, not the IRS's default.

By default, the IRS treats a single-member LLC as a sole proprietorship and a multi-member LLC as a partnership for tax purposes. That means rental income passes through to your personal tax return, and you pay income tax on it at your individual rate. You also owe self-employment tax on that income — currently 15.3% combined for Social Security and Medicare — unless you make a separate election to be taxed as an S corporation.

If you own the LLC with other people, each member reports their share of rental income and losses on their own return. If you own it alone, you report everything on Schedule C (if you treat it as a sole proprietorship) or on Form 1040 with a Schedule E attachment (if you want to report it as rental income rather than business income). The difference matters for deductions and how losses can be used.

You can also elect to have your LLC taxed as a C corporation, though that is rare for rental property because it creates double taxation — the LLC pays corporate tax, then you pay tax again on dividends. Most landlords who use an LLC either stick with the default pass-through treatment or elect S corporation status to reduce self-employment tax.

Key Takeaways

  • A single-member LLC is taxed as a sole proprietorship by default, meaning rental income flows to your personal return and you owe self-employment tax on it.
  • A multi-member LLC is taxed as a partnership by default, with each owner reporting their share of income and losses on their individual returns.
  • You can elect to have your LLC taxed as an S corporation using Form 2553, which can reduce self-employment tax but requires you to pay yourself a reasonable salary.
  • Rental expenses — mortgage interest, property tax, repairs, insurance, utilities you pay, and depreciation — are deducted the same way regardless of LLC structure.
  • The choice of LLC structure is a tax decision, not a liability decision; the liability protection exists either way.

How pass-through taxation works for rental LLCs

When your LLC is taxed as a sole proprietorship or partnership, the LLC itself does not pay income tax. Instead, the income and deductions "pass through" to you or your members, and each person pays tax on their share at their individual rate.

For a single-member LLC, you report rental income on Schedule E of your Form 1040, along with all deductible expenses. The net income (or loss) then flows to your main tax return. You also calculate self-employment tax on that net income using Schedule SE, which adds roughly 15.3% to your tax bill on top of your regular income tax rate.

For a multi-member LLC, the LLC files an informational return (Form 1065) that shows total income and deductions, but the LLC pays no tax. Instead, the IRS sends each member a Schedule K-1 showing their share of income, losses, deductions, and credits. Each member then reports their K-1 amounts on their own Form 1040. Self-employment tax applies to each member's share of net rental income.

Self-employment tax and why S corporation election matters

Self-employment tax is the biggest cost difference between LLC structures. When you report rental income as a sole proprietor or partner, you owe self-employment tax on the net profit. That is 15.3% combined — 12.4% for Social Security (on income up to a cap, currently $168,600 for 2024) and 2.9% for Medicare (on all income).

If you elect to have your LLC taxed as an S corporation, you must pay yourself a reasonable salary as an employee and pay payroll taxes on that salary. But any profit left over after your salary is not subject to self-employment tax — you pay regular income tax on it, but not the extra 15.3%. This saves money when your rental profit is substantial, though the savings shrink if you have only one or two properties.

To make an S corporation election, you file Form 2553 with the IRS. The election is effective on the date you file it or on a date you specify, and it applies to the tax year you choose. You will also need to file Form 1120-S (the S corporation return) each year instead of Schedule E, and you must run payroll for yourself, which means paying quarterly estimated taxes and filing W-2 forms.

The S corporation election makes sense if your annual rental profit is $60,000 or more and you have the cash flow to pay yourself a salary. Below that threshold, the savings usually do not justify the extra paperwork and payroll costs.

Deductions and depreciation work the same way regardless of structure

The deductions you can claim on rental property do not change based on whether your LLC is taxed as a sole proprietorship, partnership, or S corporation. You deduct mortgage interest (not principal), property tax, insurance, repairs and maintenance, utilities you pay, advertising for tenants, property management fees, legal and accounting costs, and depreciation.

Depreciation is the largest deduction for most landlords. You depreciate the building itself (not the land) over 27.5 years, which means you deduct roughly 3.6% of the building's value each year. If you buy appliances, flooring, or other improvements, you may be able to depreciate those over shorter periods. Depreciation is a non-cash deduction — you do not actually spend the money, but you reduce your taxable income by the amount.

One important rule: if your rental expenses exceed your rental income in a year, you have a loss. Losses from rental real estate are subject to the passive activity loss limitation, which generally prevents you from using those losses to offset other income like wages or investment gains. There are exceptions — if you actively participate in managing the property and your income is below $150,000, you can deduct up to $25,000 of losses — but most landlords cannot use large losses to reduce their overall tax bill.

State and local taxes on LLC rental income

Many states impose a separate tax on LLC income, and some charge an annual LLC fee regardless of income. These vary widely by state and do not change based on your federal tax classification.

Some states tax LLC income as business income at a higher rate than individual income tax. Others treat it the same as personal income. A few states have no income tax at all. Some charge a flat annual fee to maintain the LLC (ranging from $50 to $800 depending on the state), and a handful charge a fee based on your gross revenue.

You should check your state's tax rules before forming an LLC or electing S corporation status, because the state tax cost can outweigh the federal self-employment tax savings. A tax professional in your state can tell you whether S corporation election makes sense for your situation.

Record-keeping and reporting requirements

Regardless of how your LLC is taxed, you must keep records of all rental income and expenses. The IRS expects you to have receipts, bank statements, or other documentation for every deduction you claim. For rental property, that means keeping records of rent received, mortgage statements, property tax bills, insurance policies, repair invoices, and utility bills.

If you have employees (including yourself as an S corporation employee), you must file payroll tax returns quarterly and annual W-2 forms. If you have other LLC members, you must provide each member with a Schedule K-1 by March 15 of the following year. If you elect S corporation status, you file Form 1120-S by March 15 as well.

Many landlords use accounting software or hire a tax professional to track income and expenses throughout the year. That makes filing easier and reduces the risk of missing deductions or making errors that trigger an audit.

Frequently Asked Questions

Do I have to use an LLC to own rental property, or can I own it personally?

You can own rental property personally or through an LLC. The LLC provides liability protection — if a tenant is injured on the property and sues, they generally cannot go after your personal assets. Owning personally means you report rental income on Schedule E without forming a business entity, but you have no liability shield. The tax treatment is similar either way unless you elect S corporation status.

If I have multiple rental properties, do I need a separate LLC for each one?

No. You can own multiple properties in a single LLC. Some landlords use separate LLCs to isolate liability — if one property is sued, the others are protected — but that is a liability decision, not a tax one. Taxwise, one LLC with multiple properties is simpler because you file one return instead of many.

Can I deduct losses from my rental LLC against my job income?

Generally no, because of the passive activity loss limitation. Rental real estate is considered a passive activity, so losses cannot offset wages or other active income. The exception is if you actively participate in managing the property and your modified adjusted gross income is below $150,000; then you can deduct up to $25,000 of losses per year. Above $150,000 income, the exception phases out.

What happens to my LLC's tax status if I sell the property?

Your tax classification does not change automatically when you sell. If you elected S corporation status, that election stays in place until you revoke it or the LLC dissolves. When you sell the property, you report the gain or loss on your tax return, and the LLC continues to exist unless you formally dissolve it. If you want to change your tax classification after a sale, you file a new Form 2553 or Form 8832 to make that election.

Do I need to file a separate tax return for my LLC?

If your LLC is taxed as a sole proprietorship, you do not file a separate return — you report everything on your personal Form 1040. If it is taxed as a partnership, the LLC files Form 1065 (informational only; no tax is due), and you report your share on your personal return. If you elect S corporation status, you file Form 1120-S, which is a separate return that shows the LLC's income and deductions.