llc for real estate investors
LLCs are rapidly becoming a recommended entity type for holding and investing in real estate. Here are the benefits they bring, as well as the drawbacks.
Limited liability firms have emerged as one of the most preferred company structures for buying real estate. When buying real estate or transferring titles, CEOs often choose to create an LLC so that the LLC becomes the official owner of record rather than the individual members.
The advantages and disadvantages of creating an LLC for investment in real estate are listed below.
Advantages
Avoiding Personal Liability
The key benefit of an LLC is that If an unforeseen event occurs involving your property, you want the greatest options for limiting your liability. LLCs offer such security. For example, even if you don’t live there or know the visitor personally, they could decide to file a claim against you as the property’s owner if someone is harmed while on your territory.
Your landowner’s insurance policy would provide insurance up to a specific financial limit in the event that you purchased property insurance to cover such occurrences. However, if the injured party requests more compensation than the policy would cover, your private assets may be at risk.
On the other hand, if you have an LLC, its title and deed to the property, only the LLC (not you) would be listed as a defendant. More critically, if the offended party wins their lawsuit, only the LLC’s assets would be required to pay any money loss awarded. As a result, you are given anonymity, and your private assets are protected.
Placing a property title in an LLC’s name protects you from financial penalties if the LLC becomes involved in a legal dispute.
The sale of real estate owned by an LLC- the judgment debtor, cannot be compelled if a third party successfully obtains a monetary judgment. The standard procedure is for the judgment creditor to request a “charging order” from the court, which establishes a lien on the real estate. Even while it’s not a reason to celebrate, it’s better than completely losing the property.
The Internal Revenue Service provides attractive tax treatment to LLC members who hold real estate as part of their investment portfolio. You earn from so-called pass-through taxation whether you are the only owner of the LLC (single-member LLC) or one of the numerous members (multimember LLC).
Pass-through taxation, as used for federal income tax purposes, refers to the fact that any revenue received by the LLC, including profits from real estate (such as rental income from leasing an LLC-owned property), will pass through the LLC to its members.
Any income the LLC receives is solely liable to individual taxation rather than corporate taxation (as would be the case with a conventional corporation). The income is disclosed by each LLC member on Schedule C of their federal income tax returns. Members of an LLC are protected from double taxation by these pass-through regulations.
Professional Appearance
The public’s perspective of real estate ownership and holding in the name of an LLC is enhanced, particularly when a property is being advertised for lease to industrial or residential tenants.
Renting from “Smith Properties LLC” rather than “Joe Smith” may be more comfortable for an individual or company wishing to lease property.
Simple Transfers
A fairly straightforward transfer of membership interests can be used to sell an LLC. The LLC will continue to be the real estate owner, but with new LLC members. The transfer is seamless, and continuity is guaranteed.
Disadvantages
The ‘Due on Sale Clause
Any real estate that is currently held in a person’s name should be transferred to an LLC with precaution. If a person initially obtained financing and was approved for a mortgage for the property, their name will be listed as the official owner of record on the mortgage documentation.
The LLC owner must make sure that the name on the property insurance paperwork corresponds to the grantee on the deed if real estate is transferred from an individual owner to an LLC – which is treated as a sale of the property. If insurance is escrowed, the mortgage lender will frequently become aware of the transfer when the property insurance invoice is due and may argue that the transfer violates the mortgage’s “due on sale” term.
The due on sale clause is a typical condition in a mortgage that stipulates that the borrower (i.e., the listed property owner) must pay the entire mortgage amount at the time of a sale. Before relocating real estate from an individual’s name into the LLC, you might wish to ask the mortgage lender for a waiver.
Transfer Tax Obligations
Depending on the state, LLCs could also trigger transfer tax problems. If a person transfers ownership to an LLC in Delaware, for example, there are no transfer taxes due as long as the ownership interests are the same before and after the transfer. The ownership percentage interests before the transfer must match the proportion of membership interests in the LLC. Be cautious that some states, like Pennsylvania, will still tax the transfer. Before forming an LLC, make sure to review the laws of your state.
How LegalZoom Can help you in LLC Formation
Over 2 million times, LegalZoom has supported business owners in turning their ideas into profitable enterprises. Here is how you can start the procedure now:
- If you have chosen a business name, then tell LegalZoom.
- Reply to a few queries.
- We’ll finish and submit your paperwork.