Single-member LLCs
If it’s a single-member LLC, the answer is no, it won’t affect your taxes. A single-member LLC is always completely disregarded for federal tax purposes. So you won’t pay any more or less federal tax by putting a rental property in an LLC. It has no effect on whether you can use any tax strategies, including the STR loophole, or the types of deductions you can take. Your LLC income and expenses “pass-through” to your personal taxes, so the resulting tax is the same whether you have an LLC or not. But depending on your state, there may be fees associated with the LLC, which can be substantial in some states (I’m looking at you, California!).
Multi-member LLCs
If it is an LLC with more than one member, the answer is more complicated. When the LLC has more than one member, then by default the IRS considers you to have a partnership, and a partnership has to file a 1065 partnership tax return. The partnership itself doesn’t pay taxes, but the 1065 tax return determines how the income/expenses from the partnership flow to the personal tax returns of each of the members.
There is a narrow exception if the only members of the LLC are two married spouses, and you live in a community property state. If you don’t know if your state is a community property state, you can Google the name of your state and “community property state” and you should get the answer. But in that specific situation, you can choose to be treated either as a partnership, or you can choose to disregard the LLC and just report the rental or business on your personal joint tax return.
Even if you didn’t have the LLC, if you are in business with another person, you would usually be considered to have a partnership anyway, so the 1065 tax return would be needed regardless of the LLC. There is also an exception to that, which is if the only business you are conducting is managing a rental property, and it’s not in an LLC, in that specific case you may qualify to be treated as a tenancy in common rather than a partnership. In that case you would split the income/expenses of the rental on your personal tax returns, but not be required to file a 1065 partnership return.
