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I have a rental unit (condo). I would like to know if it's better to just keep it as a rental unit or put it under an LLC and if the tax implications change?

Currently, it's fully a rental unit (owner doesn't live in the house) and so I can claim mortgage interest payments. But why can't I also claim the principal paid? This seems like as time goes on and I pay more of the principal, I get less tax benefits.

If I convert the property into an LLC, what additional tax benefits I get and are there certain tax benefits I lose? I read about the avoidance of double taxation but don't quite get it. I live in California, btw.

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In the US LLC is a disregarded entity for tax purposes and is effectively ignored.

In California LLC provides liability protection and limitations. In return you're liable for an LLC tax which is at minimum $800 annually and depends on your gross receipts.

So while there are no tax benefits, there are definitely costs.

While insurance in California is problematic, you still need to do the math of which one is more cost effective to protect your assets from potential liability.

Re the question about principal - you cannot claim it as an expense because it isn't. Principal increases your equity.

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  • Ah I see got it, good to know, thank you. I was hoping the principal paid can be claimed as part of a business expense.
    – Jonathan
    Commented Apr 13 at 6:07

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