How to Start a Real Estate Sole Proprietorship in 5 Steps (2025)

Starting a real estate business as a sole proprietorship offers a straightforward path for landlords and investors. This business structure simplifies legal and tax requirements, making it appealing for managing rental income and property.

This guide will walk you through the essential steps to form a sole proprietorship for your rental property business in 2025, ensuring you understand the process from registration to daily operations.

Key takeaways

• A sole proprietorship is a simple, unincorporated business structure for individual owners.
• Key steps include choosing a name, obtaining permits, and registering with tax authorities.
• Establishing a separate business bank account is crucial for financial clarity and legal separation.
• Landlords must understand IRS Schedule C filing and estimated tax requirements.
• Effective bookkeeping and risk management are vital for operating a rental property as a sole proprietor.

What is a sole proprietorship in real estate?

A sole proprietorship is an unincorporated business owned and run by one individual. As a real estate investor, this means you own the business personally, and its income and expenses are reported on your individual tax return.

This structure is common for landlords managing one or a few rental properties. It offers simplicity and low setup costs compared to more complex entities. But, it also means your personal assets are not legally separated from your business liabilities, a key difference from structures like a limited liability corporation (LLC).

How to create a sole proprietorship for a rental property

Establishing a sole proprietorship in real estate involves several key steps. These actions ensure your business is legally recognized and compliant with local, state, and federal regulations.

Step 1: Choose and register your business name

You can operate your sole proprietorship under your legal name without any formal registration. However, many landlords prefer a distinct business name, known as a "doing business as" (DBA) name. Registering a DBA name, sometimes called a fictitious name, typically happens at the county or state level. This registration legally links your chosen business name to you as the sole proprietor.

Step 2: Obtain necessary real estate licenses and permits

The specific licenses and permits required for operating rental property as a sole proprietor vary significantly by location. You will need to check local municipal and state guidelines. These might include landlord licenses, business operation permits, or specific housing permits. It is crucial to research your specific city and state requirements to ensure full compliance.

Step 3: Register with tax authorities and understand IRS filing requirements

As a sole proprietor, you typically use your Social Security Number (SSN) for tax purposes. If you plan to hire employees or structure your business differently, you might need an Employer Identification Number (EIN) from the IRS. You do not need to register your sole proprietorship with the IRS as a separate entity. Instead, you declare your business activities and income on your personal income tax return.

Step 4: Open a business bank account

Separate sole proprietor business bank accounts help you simplify bookkeeping, protect against audits, and reduce tax preparation time. Commingling funds from your rental property with your personal finances can lead to confusion and make it challenging to accurately track deductible expenses or income for tax purposes. By keeping funds separate, you can easily distinguish between personal spending and business-related transactions.

To open a sole proprietorship business bank account, you will need several documents. 

These usually include the following:

• Government-issued ID (A driver’s license or passport)
• Proof of business address (Utility bill, lease agreement, or similar documentation)‍
• Social Security Number (SSN) or Employer Identification Number (EIN)

Doing Business As (DBA) documentation (required if your business operates under a different name than your legal name)

Choosing the best banking solutions for landlords

When choosing a business banking solution, landlords need features that support their specific operational needs. Look for accounts that facilitate easy expense tracking, rent collection, and financial reporting. Many states also require landlords to hold tenant security deposits in separate accounts, often interest-bearing.

Baselane offers an integrated platform designed for real estate investors, providing banking solutions that streamline these processes. You can set up a dedicated business bank account for your vacation rental home or other properties, ensuring funds are properly managed. Baselane also helps landlords structure rental property bank accounts to manage finances across multiple properties efficiently.

Tax considerations for sole proprietor landlords

For landlords operating as sole proprietors, tax obligations are directly linked to your personal income. You are responsible for paying self-employment taxes, which cover Social Security and Medicare. This involves understanding how to report your rental income and expenses to the IRS.

Sole proprietors report their business income and expenses on Schedule C, Form 1040, when filing their personal tax returns. This form details your profit or loss from the rental activity, which then factors into your overall taxable income. You will also likely need to make estimated tax payments quarterly throughout the year to cover your income and self-employment taxes.

Some real estate professionals may qualify for additional tax benefits if they actively participate and meet specific IRS 50% and 750-hour tests in 2025. Meeting these criteria allows you to treat rental losses as active rather than passive, potentially offsetting other income. Always consult a tax professional to understand your specific eligibility and maximize your deductions.

Operating and managing your rental property as a sole proprietor

Successfully launching a sole proprietorship for property management involves more than just setting it up; it requires diligent ongoing operations. Effective management ensures profitability, tenant satisfaction, and compliance. Becoming a sole proprietor landlord means taking full responsibility for all aspects of your rental business.

Essential bookkeeping and record-keeping tips

Accurate bookkeeping is fundamental for any sole proprietor real estate investment business. Keeping meticulous records of all income and expenses simplifies tax time and provides a clear financial overview. You should track rent payments, property maintenance costs, utility bills, and other operational expenditures. Baselane's bookkeeping features can auto-categorize transactions and help generate detailed Schedule E reports, saving you significant time.

Capturing receipts and adding notes to transactions ensures you have robust documentation for deductions. This diligence is crucial for a sole proprietor, as your business finances are directly tied to your personal tax return. Proper records can safeguard you in case of an audit and help you make informed financial decisions.

Insurance requirements and risk mitigation

While a sole proprietorship offers simplicity, it does not provide personal liability protection. This means your personal assets could be at risk if your rental business faces a lawsuit. Therefore, robust landlord insurance is essential to mitigate potential risks. This typically includes property damage coverage, liability coverage for tenant injuries, and potentially loss of income coverage.

Consider additional umbrella policies for broader protection, especially as your portfolio grows. Regularly review your insurance coverage to ensure it aligns with the value of your properties and potential liabilities. Proactive risk management is a key aspect of operating a rental property as a sole proprietor.

Leveraging technology for efficient management

Modern landlords increasingly rely on technology to streamline their operations. Software and tools can automate rent collection, simplify accounting, and provide valuable financial insights. Baselane offers a comprehensive platform designed to empower real estate investors.

With Baselane, you can automate rent collection, send reminders, and track payments in real-time. Its integrated banking and bookkeeping features allow you to consolidate all your financial transactions. This gives you a clear view of your cash flow and helps you generate essential financial reports for your rental income, making it easier to manage your sole proprietorship efficiently.

Establish your sole proprietorship today

Establishing a sole proprietorship as a new landlord is an excellent way to start in real estate. The steps discussed in this guide should help you create a separate legal entity to manage your finances and mitigate risks.

To make this transition even smoother, Baselane offers an integrated solution for banking, bookkeeping, and rent collection. Our tool helps you organize your money, simplify accounting, and collect rent efficiently, allowing you to focus on growing your real estate business. Try Baselane today!