LLCs and real estate seem to go hand in hand these days. Anyone you talk to who ventures into real estate investing understands the need for liability protection, but may not understand the proper way to protect yourself. Your broker may have told you that an umbrella policy will work, but I have a different opinion. Using an entity to hold real estate is a great way to protect yourself from liability, provide some tax benefits, and give you peace of mind that your personal assets are protected.
Many clients come to me before buying a rental property to understand all the ins and outs of real estate investing and how to protect themselves. Now, there are many different ways to structure a real estate investment empire, but I want to focus on using the LLC to maintain a property. An LLC, or Limited Liability Company, is a large entity in which to maintain property. The ease of formation and limited paperwork that must be accomplished in order for the LLC to be a good fit for a real estate investor who wants to focus on finding deals, not handling paperwork. There are no board meetings, annual presentations, and cumbersome minutes that are written every month.
Another benefit of an LLC is the tax treatment. As a single-member LLC, there are no additional federal tax returns that need to be filed unless a corporate tax election is made (outside the scope of this post), so the LLC is essentially taxed as a sole proprietorship in its individual statement. If there are 2 or more owners, the LLC is taxed as a partnership (again, unless a corporate election is made) and the income and losses are transferred to the owners’ individual tax returns. No double taxation.
Lastly, due to the ease of setup and management, LLCs can be used to help spread liability risks across entities. Most of my clients do not put more than 2-3 properties in 1 LLC, thus keeping the risk spread across the entities. For example, if a client has 6 properties owned by 3 separate LLCs and someone is injured on property 1, owned by LLC 1, that person will only be able to access the properties of LLC 1, except for special circumstances. If all 6 were owned by the same LLC, all of the equity in those properties would be at risk.
As you can see, LLCs are excellent vehicles for holding real estate from a liability and tax perspective. We have only scratched the surface with this discussion. For more information on LLC formation to hold real estate and the dos and don’ts, contact our office today at www.cozzalaw.com