Buying Real Estate As An LLC: Everything You Need to Know
Buying real estate as an LLC can be a useful investment method, and over the past decade, it has become one of the most preferred ways to hold properties. 4 min read
2. Why Not Use Liability Insurance Instead?
3. LLC Tax Benefits
4. More Benefits of an LLC
5. Using LLCs for Privacy Protection
Updated October 23, 2020:
Buying real estate as an LLC can be a useful investment method, and over the past decade, it has become one of the most preferred ways to hold properties.
The LLC structure was created in 1977 as a form of special legislation for oil companies in Wyoming. Before that, investors in real estate who wanted liability protection had to create corporations, which have significant disadvantages. The next state to allow LLCs was Florida, and now every state in the U.S. has passed legislation to allow for this type of business entity.
Why Use an LLC?
Buying real estate as an investment through an LLC is desirable because it offers protection from personal risk, tax benefits, and it is relatively easy to administer.
LLCs are legal entities that are separate and distinct from their owners or members. An LLC has its own tax ID and can open a business bank account in the company name. Since it is separate from the owners, they are not personally liable for any lawsuits or debts arising from business practices. It's not perfect, though; states usually charge an annual fee for LLC registration, which can range from $100 to $500 or even more.
Why Not Use Liability Insurance Instead?
Not every property owner can benefit from using an LLC. For some, it isn't worth the trouble just to obtain protection from the risk of lawsuits and other hazards when they can get similar benefits from liability insurance. However, doing this involves risk. Insurance policies that cover liability usually have exceptions, limits, and other loopholes. While it may be unlikely that a loss that exceeds its limits occurs, if it does happen, the results can be catastrophic. For this reason, many property owners are choosing to deal with the extra work involved in maintaining an LLC and take advantage of its benefits.
LLC Tax Benefits
Multiple-member and single-member LLCs also enjoy another advantage, which is pass-through taxation. The IRS considers single-member LLCs as “disregarded entities” for tax purposes and treats them like sole proprietorships. This means that all profits pass through the business to the owner, who reports them on their personal tax return while still reaping the benefits of limited liability. Owners of single-member LLCs can even deduct the mortgage interest, depending on current IRS rules.
Multiple-member LLCs are treated like partnerships by the IRS and must file an informational tax return, and also enjoy the benefits of pass-through taxation. Members report their share of the profits on their own tax forms.
More Benefits of an LLC
Besides the tax considerations and liability protection, LLCs have many other benefits to real estate investors, such as:
- There is no limit on the number of owners.
- LLCs do not require a board of directors like corporations do.
- An LLC can be managed by its owners or third-party managers.
- States typically charge lower fees for registration and maintenance than corporations pay.
- Profits can be distributed any way the members choose to do so, regardless of the members' percentage of ownership.
- LLC owners can be foreign investors, unlike an S corporation.
- Ownership of real estate can be passed to heirs without the need to execute a new property deed or pay taxes and fees for doing so.
- Owners of LLCs can more easily remain anonymous than owners of corporations.
Using LLCs for Privacy Protection
All real estate investments involve risk. However, following the rules and requirements of LLC formation and maintenance can improve your odds. If you are just beginning the process of real estate investment, now is the time to form your LLC. It is a lot easier to purchase real estate through an LLC than transferring it to that entity later on.
Some people may think that using an LLC to purchase real estate is shady, because of its anonymous nature. The owners' identities are somewhat shielded from the public. Of course, many investors do it for other reasons, such as legal liability, tax reasons, or because they were advised to do so by an accountant or attorney. Celebrities or public figures might have genuine privacy or personal safety concerns and wish to hide the location of property they own.
States vary in terms of how much privacy they allow LLC owners, but the structure is often used to conceal ownership of real estate or other assets. LLC owners do not have to make the identities of members public information. This can also be a way to conceal investments that might reveal a conflict of interest.
If you need more information or help with buying real estate as an LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.