Investing in real estate can be a complicated process. That is why many people turn to establishing limited liability companies, or LLCs, to account for all of the complex legal and tax implications of owning multiple properties. Before you advise someone on their options or choose one for yourself, here are some things you may want to know about LLCs in real estate.
- The difference between an LLC and liability insurance. Before we dive into the ins and outs of LLCs, it is important to note that the option isn't perfect for everyone. There are costs associated with starting and maintaining an LLC, which may make them inadvisable for some investors. There will be cases when taking liability insurance policies out will be a better solution. That said, for those who want the added structure of a company, forming an LLC can be a good option.
- How to form an LLC. The steps, in general, are surprisingly simple. Many of the rules will vary from state to state, so be sure to consult an expert where you live to ensure compliance. Here are the basic steps.
- Choose a name that complies with state law.
- File the paperwork and pay the fee, typically around $100 to $800 depending on your state.
- Create an operating agreement for all members of the LLC.
- Obtain the licenses that are necessary to form your business from your state.
- In some states, you may need to publish a notice of intent to form your LLC.
- How an LLC impacts taxes. The primary benefit of having an LLC for property investments is no double taxation. Income and capital gains generated by the LLC will essentially bypass the owner, who will only have to pay individual taxes. There is no separate tax on the LLC, thus avoiding double taxation. Owner of an LLC can also use the mortgage as a deduction on their taxes.
- Additional benefits to LLCs. LLCs do not have to have the same corporate structure as other business entities. They can be managed either by the owner or a third party. Foreign ownership of an LLC is permitted, unlike with an S-Corp. LLC owners can also transfer ownership of properties by giving interest to heirs, which can, over time, completely pass on the ownership without paying fees associated with the transfer.
Does an LLC make sense for real estate investments for yourself or your clients? Contact our office to better understand how to make an LLC work for you.