LLCs and real estate seem to go hand in hand these days. Anyone you talk to who dabbles in real estate investing understands the need for liability protection, but may not understand the proper way to protect yourself. Your insurance broker may have told you that an umbrella policy will work, but I have a different opinion. Using an entity to hold real estate is a fantastic way to shield yourself from liability, provide some tax benefits, and give you the peace of mind that your personal assets are protected.

Many clients come to me before purchasing a rental property to understand all the ins and outs of real estate investing and how to protect themselves. Now, there are many different ways to structure a real estate investment empire, but I want to focus on using the LLC to hold the property. An LLC, or Limited Liability Company, is a large entity in which to own ownership. The ease of formation and the limited formalities that must be met make the LLC a good fit for a real estate investor who wants to focus on finding business, not handling paperwork. There are no board meetings, annual presentations, and cumbersome minutes that are drawn up every month.

Another benefit of an LLC is the tax treatment. As a single-member LLC, no additional federal tax returns are required unless a corporate tax election is made (outside the scope of this post), so the LLC is essentially taxed as sole proprietorship on its individual return. . If there are 2 or more owners, the LLC is taxed as a partnership (again, unless a corporate election is made) and the income and losses carry over to the owners’ individual tax returns. No double taxation.

Lastly, due to the ease of setup and administration, LLCs can be used to help spread liability risks between entities. Most of my clients place no more than 2 or 3 properties in 1 LLC, thus keeping the risk distributed between the entities. For example, if a client has 6 properties owned by 3 separate LLCs and someone is injured on property 1, owned by LLC 1, that person will only be able to access the properties owned by LLC 1, barring special circumstances. If all 6 were owned by the same LLC, all of the equity in those properties would be at risk.

As you can see, LLCs are excellent vehicles for holding real estate from a liability and tax perspective. We have only scratched the surface with this discussion. If you would like more information on forming an LLC to own real estate and the do’s and don’ts, contact our office today at www.cozzalaw.com