real estate investments with an LLC
Real Estate Adviser,
I operate a small real estate investment business and am trying
to determine if there is any value -- economic, legal, tax or other
-- of owning your personal home through a limited liability company?
What about owning rental properties through one?
You've got things flipped around a little here. If you're a business
owner, a limited liability company, or LLC, structure can protect
your home and other personal assets from court judgments. But the
house itself, as your personal home, wouldn't fall under such a
However, you can form a company owning real estate
that could be served quite well under the LLC flag.
Rental-property ownership, as you probably realize,
is fraught with inherent financial risks such as potential environmental-contamination
claims, fire-related claims, slip-and-fall claims and other injury
claims. A lot of owners of income-producing real estate like to
operate under an LLC because their personal assets, such as stock,
bank accounts, vehicles and their other LLCs, aren't at risk if
an accident or other incident occurs on premises or if undesirable
flaws in it suddenly surface.
Generally, all that is at stake in a lawsuit against
an LLC is each member's investment in that LLC business. Often,
owners of multiple properties split them up into separate LLCs to
segregate their problem assets from their premium assets. Of course,
LLC owners -- or "members" as they're called -- are not exempt from
personal actions of fraud or negligence. But that doesn't keep some
fly-by-night builders and other bad-faith operators from hiding
behind them, unfortunately.
LLCs allow for flexible profit distribution among
their members. They also provide a veneer of personal privacy when
a plaintiff attorney is doing an asset search in anticipation of
filing a lawsuit.
On the tax side, an LLC benefits greatly from its
classification as a "pass-through" company, which means its income
is passed through to its owners and claimed on those owners' individual
returns. Hence, it is subject only to capital gains on the ownership
shares of the member, and not to corporate capital gains taxes,
so there's no double taxation. LLCs with just one owner-member,
however, are taxed as a sole proprietorship. LLCs are certainly
not headache-free. They can be relatively expensive and complex
to set up and may be dissolved if a member dies or withdraws. Some
states have unique laws that govern LLCs.
But if you're getting into serious real estate investment,
the LLC provides you many protections.