LLC’s and real estate seem to go hand in hand these days. Anyone you talk to who is in real estate investing understands the need for liability protection, but may not understand the proper way to protect themselves. Their insurance broker may have told them an umbrella policy would work, but I have a different opinion. Using an entity to hold real estate is a fantastic way to protect yourself from liability, provides several tax benefits and gives you peace of mind that your personal assets are protected.
Many clients come to me before they buy 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 wanted to focus on using an LLC to hold property. An LLC, or Limited Liability Company, is a great entity for holding property. The ease of formation and the limited formalities that need to be adhered to make LLCs suitable for real estate investors who want to focus on finding deals, not handling paperwork. No board meetings, annual submissions, and burdensome minutes are made each month.
Another benefit of an LLC is the tax treatment. As a sole member LLC, no additional federal tax filings need to be made unless a corporate tax election is made (beyond the scope of this posting), so the LLC is essentially taxed as sole proprietorship on your personal returns. If there are 2 or more owners, the LLC is taxed as a partnership (again unless a company selection is made) and income and losses are passed on to the individual tax return owners. No double taxation.
Finally, because of the ease of setting up and managing, LLCs can be used to help spread liability risk between entities. Most of my clients put no more than 2-3 properties into 1 LLC, thus keeping the risk spread between entities. For example, if a client has 6 properties held in 3 separate LLCs and someone is injured in property 1, which is owned by LLC 1, that person will only be able to acquire property owned by LLC 1, except in special circumstances. If all 6 were owned by the same LLC, all equity in the property would be at risk.
As you can see, an LLC is a great vehicle for holding real estate from a liability and tax perspective. We are only scratching the surface with this discussion. If you would like to find out more about forming an LLC to hold real estate and what the do’s and don’ts are, contact our office today at www.cozzalaw.com