LLC and Real Estate Investment
Limited Liability Companies (“LLCs”) offer a multitude of benefits to real estate investors. However, LLCs may not be the right choice for every investor as the field of real estate investing is incredibly diverse, and it requires a thorough analysis to determine if an LLC will provide both liability protection and tax efficiency for a proposed real estate venture.
Liability Protection from an LLC
As to liability protection, any lawsuit that comes against an LLC is aimed specifically at the company, not the individual responsible for it. If the real property in question was owned by an LLC, the LLC owner’s risk exposure would be insulated by the protection of the company, leaving only the assets owned by the LLC as opposed to all of the owner’s personal assets exposed to potential lawsuits. If properly structured, this would not put the LLC owner’s personal finances in jeopardy.
Tax Efficiency with an LLC
As to the tax efficiency, real estate investors can avoid double taxation by acquiring real property through an LLC. As defined by the default tax classification rules, the Internal Revenue Service (“IRS”) classifies a real estate holding company with one owner in the same way it would a sole proprietorship, otherwise more commonly referred to as a “disregarded entity.” Accordingly, any income and capital gains generated by the LLC would transcend to the owner of the LLC, who, as a result, would only have to pay taxes as an individual. However, the respective LLC owner still enjoys the protection against liability. In forming an LLC, the owner is not only subjected to fewer taxes, but he or she is awarded more deductions. LLCs with more than one owner, also known as multimember LLCs, are taxed similar to that of a partnership. These multimember LLCs also enjoy the benefits of pass-through taxation as the LLC passes its profits and losses through to its owners.
Seek Expert Advice well in Advance
Each respective LLC owner is then responsible for reporting his or her share of the profits or losses on either a Schedule C, K or Form 1065 with his or her individual income tax returns. Consult a professional well in advance, to ensure you’re getting the most out of your tax return, and that your documentation is complete. On the bright side, accounting fees are often tax deductible!