Real Estate LLC Structure: Everything You Need to Know
The real estate LLC structure has become increasingly popular in the past several years. 3 min read
2. Personal Asset Protection
3. Enhanced Tax Benefits
4. Benefits of a Real Estate LLC
5. Steps After Forming Your Real Estate LLC
Real Estate LLC Structure
The real estate LLC structure has become increasingly popular in the past several years. There are very few types of business structures that can protect a business owner from debts of the business, but this is exactly what the LLC does. There are several benefits to operating an a real estate LLC, including:
- Personal asset protection
- Enhanced tax benefits
- Ease of administration
Personal Asset Protection
First and foremost, the LLC provides limited liability protection for its owners. Therefore, if a creditor or other plaintiff files a lawsuit against your real estate LLC, they cannot go after your personal assets. Therefore, your home, car, personal bank account, and other personal investments are protected. Keep in mind that while this is one of the greatest benefits of an LLC business structure, there are some exceptions. Particularly, if an owner personally guarantees a loan, acts as though the LLC is an extension of him or herself, engages in an illegal act, or acts fraudulently, then the owner could be held personally liable (piercing the corporate veil).
Enhanced Tax Benefits
LLC owners avoid double taxation that C corporations face. Specifically, the Internal Revenue Service (IRS) classifies a real estate LLC in the same way as most other single-member LLCs – as a sole proprietorship, which is also referred to as a disregarded entity. For this reason, all profits and losses of the real estate LLC are passed onto the owner who reports it on his or her personal income tax return. However, the owner will still enjoy limited liability protection.
The rental income that is generated by the property doesn’t incur any tax penalties, nor does the appreciation in the value of the property incur taxation. Furthermore, the owner of a single-member real estate LLC can use mortgage interest as a deduction. Therefore, you not only benefit from reduced taxation, but can also utilize greater deductions too.
If you operate a multi-member real estate LLC, then the IRS automatically treats you as a partnership. With that said, the members will still enjoy limited liability protection. The profits and losses will pass through to the owners who will report a portion of the profits on their personal income tax returns. In order for each member to know how much to report, the LLC will need to file an informational tax return, along with Schedule K-1s. Schedule K-1 specifically indicates how much money each member will be responsible for reporting. Thereafter, each member will input that information on Schedule C, Schedule K, or Form 1065.
Benefits of a Real Estate LLC
There are many benefits to creating an LLC for your real estate investment(s). Some of these benefits include:
- Tax savings
- Reduced tax audit risk
- Enhanced credibility
If you operate as a real estate LLC, you can choose ‘S-election’ on your tax form. This will provide you with greater tax exemptions thereby reducing your taxes.
By formally creating an LLC for your real estate investment, the IRS might be less likely to audit your investment property if it is an official LLC.
By forming an LLC, you can gain enhanced credibility with potential customers, vendors, and suppliers, which could lead to additional income.
Steps After Forming Your Real Estate LLC
There are several additional steps that might need to be taken after forming your real estate LLC. You might need to obtain an Employer Identification Number (EIN) from the IRS. This can be done directly on the IRS website and is free of charge. Banks generally don’t allow a business to open a bank account without having an EIN. In addition, most real estate LLCs also elect to be taxed as an S corp. In order to do this, you will need to file IRS Form 2553 with the IRS. You might also be required to change your licensing from your personal name to your business name. You can do this by submitting a form and paying a nominal fee. Such real estate agents who form their own LLC also update their W-9 form to reflect their LLC name and business bank account. You should check with the Secretary of State where you register to see if there are any other applicable fees.
If you need help forming your real estate 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.