Many people believe that a limited liability company (LLC) is reserved for individuals actively carrying on business. In reality, an LLC is a useful business entity to simply hold assets. A common practice is forming an LLC and purchasing real estate through that business entity. There are numerous benefits associated with this type of real estate LLC ownership structure. and purchasing real estate through that business entity.
In this article we review some of the primary benefits of employing this real estate LLC ownership structure.
When using an LLC to purchase real estate, the business entity is the record owner of the real estate. The deed will be in the name of the LLC and filed with the local register of deeds of office. This real estate LLC can then be owned by one or more individuals or another company. This allows the owners of the LLC ownership structure to easily trade or transfer ownership interests without executing a new deed and paying a recording fee. This can be useful when one of the LLC owners slowly acquires a greater ownership interest in exchange for work done or services supporting the LLC or underlying property.
As discussed, the LLC purchasing real estate, is the record owner of the real estate. The real estate can then be treated as a business interest. As such, the expenses associated with owning and maintaining the real estate can be treated as a business expense. For example, if the real estate LLC has a loan and pays interest on the property, the interest can be deducted against any income generated by the real estate. Also, any maintenance to the house is a deductible expense. If the real estate LLC owners make material improvements to the property (such as a new HVAC unit), the cost can be depreciated, which is a deduction on the income tax return.
Finally, the LLC purchasing real estate may qualify to elect S-Corporations tax status. As of 2018, S-Corporations are afforded a 20% deduction for recognized income for income tax purposes. Also, if the real estate LLC members (owners) are involved in actively managing or maintaining the property, they can receive a salary for their efforts. The objective is to receive as low a salary as possible. The remainder of income from the property with be treated as unearned income. It will not be subject to Federal Insurance Corporation Act (FICA) taxes. This combination can provide considerable income tax benefits.
Personal Liability Protection
A real estate LLC can shield the owners of the LLC from personal liability for any debts and obligations of the LLC. Imagine a scenario where the real estate is being rented to earn income for the LLC. A visitor is injured when present on the real estate. He subsequently sued and obtains a judgment against the LLC. The individual could collect her judgment against the assets of the LLC. If the value of real estate LLC assets is not adequate to pay the judgment, the individual cannot seek to recover against the personal assets of the LLC owners. This is known as limited personal liability protection. It is important to remember that the LLC members must adhere to numerous formalities to make certain that a creditor cannot pierce the veil of protection afforded by the real estate LLC and reach LLC member personal assets. These formalities include adequately funding the real estate LLC for operations (and not drawing off all funds or assets), maintaining separate assets for the real estate LLC (including holding a separate bank account for profits, and not using LLC assets for personal use or personal assets for real estate LLC purposes). In the case of real estate LLC, the LLC owners should also maintain appropriate liability insurance for accidents occurring on the property.
The above-referenced benefits are just examples of how an LLC can used as an ownership vehicle for real estate. There are numerous other advantageous that employ business entities to LLC ownership structure more favorable for ownership and tax scenarios for the individuals controlling the business interests of the real estate. If you are considering using a real estate LLC, first talk with the legal professionals at LawTrades. They can provide guidance and services necessary to take full advantage of your real estate ownership structure.