An LLC can buy a house, and there are many advantages to forming an LLC (limited liability company) for a real estate investment. 

Forming an LLC For Real Estate Investments

LLCs have grown in popularity within the past 10 years, especially when it comes to real estate investment holdings.

LLCs were not considered a legal business entity until Wyoming decided to allow LLCs to form to meet oil company needs in 1977. Before these entities came into existence, property investors had to rely on the use of corporations for title acquisitions, which aren't as easy to work with as LLCs.

The next state to join in the legalization of LLCs was Florida in 1982, and eventually the entire United States came to recognize LLCs as legal business entities. This particular business structure offers protection to investors who want to invest in real estate while also providing easy administrative duties and taxation.

LLCs do offer many perks for investors looking for a holding company for their property assets, but it might not be the right fit for every real estate owner. Some investors don't find the liability protection worth the effort of an LLC startup. Liability insurance covers enough of their assets in the minds of some investors.

Liability insurance policies do have their limitations, so investors who only rely on this type of insurance for protection are taking a bit of a risk. The chances that something would happen to create enough loss for the insurance policy not to cover it are low, but if that does happen, the ramifications would be severe.

The popularity of investors using LLCs for real estate holdings is likely to continue to rise according to the current trends in the market. Property owners are continuing to learn about the benefits of this type of business entity and take advantage.

The Benefits of an LLC Holding

LLC holdings for real estate protect the property owner's personal assets from liability.

For instance, if a property owner is renting out a beach house and the renters decide to have a party. Any injuries or accidents on the property make the property owner liable. Say one of the guests falls off of the deck and gets seriously injured. If that party guest decides to sue for damages, the property owner's personal assets and finances could be in danger if they own the property as an individual.

If the property owner had formed an LLC, and that business entity was technically the owner of the property, the business could be sued, but the individual's assets would be protected. Only the other assets owned by the LLC would be liable in the lawsuit.

Property owners can also benefit from the LLC's status as a pass-through entity. Even though LLCs provide the liability protection of corporations, they are taxed like partnerships or sole proprietorships.

The profits of an LLC pass straight through the company to the company owners or members. The LLC is not taxed, so the profits are only taxed once as the income of the individual members on their personal income tax returns.

C Corporations (C Corps) are taxed as corporations, so the company profits are taxed as business income, and then they are taxed again when the dividends are distributed to shareholders. The shareholders must claim this income on their tax returns, which means the income of C Corps is subject to double taxation.

Corporation owners can avoid double taxation by electing to be an S Corporation (S Corp), but S Corps have many requirements and regulations that make it difficult for real estate investors to benefit from using them as a holding company.

The IRS automatically classifies any real estate investor's holding company as a disregarded entity or sole proprietorship. Disregarded entities are:

  •  business entities that are only subject to individual taxes 
  • are not subject to business taxes
  • Owners of these types of companies get to benefit from the liability protection of an LLC with the tax benefits of an individual.

Property owners have income from renters as well as their gains in property value. If they choose to form an LLC, they'll avoid double taxation on both of those forms of income. Current rules of the IRS also allow owners of LLCs to deduct any interest from property mortgages. 

If you need help with forming an LLC to buy a house, 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, Stripe, and Twilio.