For the many investors out there, the real estate LLC is the best vehicle for holding investment properties. The two most important benefits are liability protection and better tax consequences.
Most real estate activity involves some risk taking. If you are buying and improving properties for resale, you will be using contractors and other parties to help with the improvements. There will be contracts signed and potential for accidents and disputes that arise out of the business activity. If you are a landlord, there is significant risk as you will have a tenant- someone living on your property.
When you take into account the fact that your business is also holding property that is of potentially significant value , there is a lot to lose if a dispute or accident occurs or a lawsuit is filed.
Because of the risk profile that comes with real estate investments, it is imperative that the real estate and the business be operated through an asset protection entity. There are two main choices- the limited liabilitycompany and the corporation.
Both the LLC and the corporation offer the same level of personal liability protection. However, the limited liability company is more simple to run and easier and cheaper to maintain.
What you pay in taxes makes a real difference to the bottom line of any business. Accordingly, you will want to minimize taxes and any potential for paying more to the government as much as possible.
The real estate LLC is the dominant winner versus the corporation when it comes to taxes. With the corporation, profits from any business are taxed twice. If you sell a piece of real property, the corporation must pay taxes on the gain. Then, in order for you to reap the benefits of the profits, the corporation will distribute cash as dividends and then you personally will need to pay taxes again on any dividends you receive. When you are selling real estate, this double tax can be significant.
Even if you are primarily renting and receiving rental income, the same double tax would apply to your profits.
There are also better tax rules that apply to a real estate LLC when property is traded in for other property or converted into other uses (like personal use). Trades or property conversions made by a corporation will generally trigger tax consequences. If done through an LLC, there is an opportunity to avoid or delay the tax obligation.
Because of both the liability and tax consequences and the fact that business owners and investors can run and manage a limited liability company with very little formalities and paperwork, the real estate LLC is the best property and business vehicle for holding real property such as land, houses and buildings and for conducting rehabs, improvements, development and rental activity.