The choice of the right business entity for your investment real estate is an important decision. It is driven by many factors and can have numerous consequences. It is extremely important to work with your legal and professional advisers to determine the correct form of entity that will be used. Things to consider when choosing how to hold title to your investment property should include; personal liability, income and estate tax ramifications, lifetime and estate planning, allocation of profits, number and type of investors, lender requirements and management considerations.
For real estate, the Limited Liability Company or LLC is often the best choice for a number of reasons:
- The LLC provides liability protection for its members and managers, meaning that only the funds you invest in the LLC are at risk. Your other properties, your home, your retirement accounts, etc. are insulated from the risks associated with owning the real property.
- LLC management is very flexible and single member LLCs are allowed. There are no specific meetings or minutes that are required. An annual report to the Secretary of State is required.
- LLCs can create an Operating Agreement to guide the management of the entity or accept the default to the statutory operating agreement.
- There can be tax benefits. Real estate can often be transferred in and out of LLCs without income tax or property tax consequences. The flow-through income taxation means profits are only taxed once, and losses are passed through to the members' personal tax returns, providing planning opportunities and avoiding double taxation.
- The LLC can choose to be taxed as a general partnership or as a corporation by making the appropriate "check the box" election in IRS Form 8832 for the year that the election is made.
- For Section 1031 tax deferred exchanges, an exchanger can hold the relinquished property as an individual or trust, but acquire the replacement property as a single member LLC. That will not violate the general rule that the exchanger must take title to the replacement property in the same manner as they held title on the relinquished property.
- LLCs can also help with estate planning and family succession planning. LLC membership interests can be held in your trust and may be gifted to others at a discount.
- Additionally, lenders often require that you take title to your real estate in an LLC for asset protection and bankruptcy issues.
Even if the LLC is the right choice for your real property, there are still numerous issues to consider, including, but not limited to: in which state to form your LLC, keeping any LLC fees low, combining properties in LLCs, such as a Series LLC or having multiple LLCs, specific lender requirements, the form of management that you desire, and estate planning and Section 1031 exchange planning. Consult an attorney to help you make the right planning decisions.
The Law Offices of Flood and Favata can guide you through that maze of questions and help you to choose the best entity to hold title to your real estate. Feel free to contact one of our attorneys at 508-624-4700 to schedule an appointment or discuss your matter.