LLCs and real estate seem to go hand in hand these days. Anyone you talk to who is interested in real estate investing understands the need for liability protection, but may not understand the proper way to protect themselves. They may have been told by their insurance broker that an umbrella policy would do, but I’m of a different opinion. Using an entity to hold real estate is a fantastic way to protect yourself from liability, provide you with tax benefits and ensure 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 hold property. An LLC, or limited liability company, is an excellent entity in which to hold property. The ease of formation and the limited formalities that must be followed make the LLC a good choice for a real estate investor who wants to focus on finding deals, not dealing with paperwork. There are no board meetings, annual filings, and tedious monthly minutes.
Another benefit of an LLC is the tax treatment. As a single member LLC, there are no additional federal tax returns to file unless a corporate tax election is made (outside the scope of this article), so the LLC is essentially taxed as a sole proprietorship on your individual return. If there are 2 or more owners, the LLC is taxed as a partnership (again, unless a corporate election is made) and income and losses flow through to the tax returns of the owners. No double taxation.
Finally, due to the ease of setting up and managing, LLCs can be used to help spread liability risks between entities. Most of my clients don’t put more than 2-3 properties in 1 LLC, which spreads the risk between the entities. For example, if a client owns 6 properties belonging to 3 separate LLCs and someone is injured in property 1, belonging to LLC 1, that person will only be able to access the properties belonging to LLC 1, except in 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. If you would like to learn more about forming LLCs to hold real estate and the do’s and don’ts, contact our office today at www.cozzalaw.com