LIABILITY PROTECTION

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.

TAXATION

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.

SUMMARY

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.

This is usually done with a deed.  The most common way to do this when you are both the owner of the property and the owner of the real estate LLC is to use what is known as a quitclaim deed.  A quitclaim deed basically states that you are transferring whatever ownership interests you have in the property to the LLC.

The form of the deed will need to contain specific language that can vary based on your state.  Accordingly, you can seek the help of a local real estate attorney or find a state specific form to use if you do it yourself.  If you cannot find a form, then go to your local county and search the records for actual quitclaim deeds that were filed there.  You should be able to to find several basic forms used.

When you transfer the property to your real estate limited liability company, there may be some fees charged by your locality so call your county for specific fee details.

Your LLC should execute a resolution or consent agreeing to take on ownership of the property.

Finally, one issue that is common in this area is whether there re any issues if the property is subject to a mortgage.  If you are a borrower on a mortgage/deed of trust with a bank for the property, you need ro read your loan documents to see what conditions, limitations or restrictions they may have on the ability to transfer the property to an LLC without paying the loan off.  There is often a clause called a Due on Sale Clause which you should be aware of.If you own 100% of the LLC, there may be ways around this so check with your local real estate attorney for advice.