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Real Estate LLC Benefits: Breaking Down The Advantages

Written by Paul Esajian

What substantial real estate LLC benefits can investors obtain from incorporating their business? Better yet, how will they enhance the long-term outlook of their business?

One of the first questions an up-and-coming real estate investor needs to answer is the type of corporate structure they want to establish. If for nothing else, starting a real estate investment LLC is as important of a task as any. Choosing a business formation is important for many reasons, but most importantly, it dictates how your business will pay taxes, the type of regulations you’ll be subjected to, as well as your personal liability.

What Is An LLC?

An LLC, or “Limited Liability Company”, is a business structure that can have one or multiple owners. An LLC will either be a single-member LLC or a multi-member LLC depending on how many owners, or “members”, it contains. An LLC is both simple to create and very powerful, and we’ll discuss the benefits for creating a real estate LLC in this guide.

Breaking Down The Real Estate LLC Benefits For Investors

The legal structure of a limited liability company (LLC), which combines the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership, will generally align best with investors’ needs. Real estate LLC benefits include shielding investors from any potential liability associated with the business, including their assets, as well as enabling them to obtain significant tax savings, and so much more.

Real Estate LLC Benefits include:

  • Protection Of Assets

  • Tax Benefits

  • Building Credit For Your Business

  • Easy Registration

  • Simple To Transfer LLC Interests


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Forming a real estate LLC

Protection Of Assets

The strength of a real estate LLC is its ability to protect investors from liability, according to Nellie Akalp, CEO and co-founder ofCorpNet.com. “There really are many advantages of forming an LLC for real estate investors. Mainly the LLC is a separate legal entity from its owners, so it limits personal liability. This is important for investors who want to protect their personal assets in the case a lawsuit arises as a result of the property,” says Akalp. The power of protection from personal liability for business actions is paramount as an investor. This corporate structure enables business owners to be considered a separate legal entity from their company, ensuring they are not personally liable for debt or lawsuits from the business.

For example, if an LLC business failed to pay its debt or was sued, a creditor could only legally hold your company liable — not you personally. As a result, this protects investors from having creditors seize their personal belongings such as their house, cars, or other assets. On the flip side, the LLC business is held accountable, which means money invested into the business would be liable to debt and lawsuits.

Although several real estate LLC benefits exist, it’s also important to remember there are no foolproof methods of protection in real estate. And there are, of course, exceptions to limited liability. According to Nolo.com, a publisher of self-help legal books and software, an LLC owner can be held personally liable if he or she:

  • Personally and directly injures someone.

  • Personally guarantees a bank loan or a business debt on which the LLC defaults.

  • Fails to deposit taxes withheld from employees’ wages.

  • Intentionally does something fraudulent, illegal, or reckless that causes harm to the company or someone else, or treats the LLC as an extension of his or her personal affairs, rather than as a separate legal entity.

  • Before getting underway with the real estate LLC benefits, investors are recommended to speak with a tax and legal professional.

Asset protection is one of the more notable real estate LLC benefits an investor can gain. This corporate shield is crucial to growing and succeeding as a real estate investor, especially when buying and selling real estate.

Real Estate LLC Tax Benefits

Another real estate LLC benefit is in the form of pass-through taxation. The formation of a real estate LLC enables businesses to avoid being taxed directly, with investors reporting the company’s profits or losses on their personal tax returns. In most cases, this will result in a lower rate for business owners and the avoidance of double taxation. However, investors do have options on how they want to be taxed. Here are three general options:

  • Single Member LLC: The LLC business is not taxed; The member is taxed through their personal federal tax return.

  • Partners LLC: Members elect to be taxed as a traditional partnership.

  • Corporation LLC: Members elect to be taxed as a corporation.

Done correctly, real estate LLC tax benefits can also include thousands of dollars’ worth of annual savings. For instance, most rental property income qualifies for a 20% business income tax deduction that allows the owner to deduct this amount from their personal taxes. Some more savings can be found by deducting mortgage interest, depreciation, repairs, maintenance, property taxes, insurance, and common costs of doing business like advertising and travel.


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Builds Credit For Your Business

One of the more underrated real estate LLC benefits is the ability to build credit for your business. When an investor determines an LLC is the right corporate structure for them and their business, they can obtain an Employer Identification Number (EIN). This essentially allows for your business to build credit — without using or impacting your credit. It can be an excellent tool for investors, as it enables you to build a dominant credit rating for your business, including the ability to qualify for credit lines under your business name. This could essentially provide double the borrowing power for investors with both personal and business credit profiles.

Easy To Register

Establishing a real estate LLC is one of the easier things an investor can do. Not only is it simple and fast, almost anyone can do it. According to SBA.gov, there are four general rules that need to be followed:

1. Choose A Business Name: This name must be different from an existing LLC in your state. Also, it cannot include words restricted by your state (such as “bank” and “insurance”).

2. File The Articles Of Organization: This document seeks to validate your LLC. In most cases, it will include information such as your company’s business name, address, and the names of other members in your LLC. It will also be filed with the Secretary of State, although certain states may require you to file with other departments.

3. Create An Operating Agreement: While most states do not require an operating agreement, this contract is generally recommended for LLC companies with multiple members. This document will essentially outline the rules and regulations of your company’s business, including member’s rights and responsibilities, as well as percentages of interests and sharing of profits and losses.

4. Obtain Licenses & Permits: The last component of legally starting a real estate LLC is to obtain business licenses and permits once your business is registered. Also, some states may even require companies to announce their business by publishing a statement in the local newspaper, according to SBA.gov.

Transferring LLC Interests

It is relatively easy to sell an LLC. Through a transfer of membership interests, an LLC can be sold to a new member. The LLC will continue to own the real estate is previously owned, but a new member will gain ownership of the LLC itself.

Real Estate LLC Drawbacks

Although real estate LLCs offer many benefits for investors, there are a few drawbacks that they should be aware of before deciding to form their own. For instance, the “due on sale” can be a con of LLCs. The due on sale clause of a mortgage prevents an individual from transferring property in their name to their LLC. Seek out more information from your mortgage lender before attempting to do so, as you may be required to obtain a waiver beforehand. Also, research your state’s laws regarding transfer taxes when transferring ownership to an LLC. Transfer taxes vary a lot by state, so researching your state’s laws when considering an LLC is always recommended. Some states offer no transfer taxes if the transfer is done without changing the percentage of membership interest in the LLC before and after the transfer. Other states, however, have no such exception and will charge a transfer tax on all transfers.

LLC vs. Alternative Structures

An LLC is a business structure that offers liability protection to its members, and also offers those members many ways to manage the company. Unlike some other business structures, the LLC actually owns and manages the business, while the members decide how to split any profits gained through the LLC amongst themselves. When comparing an LLC to a corporation you will find that both offer liability protection for the owners, but a corporation is much more complicated to form and operate, while often not having the same amount of tax benefits as an LLC.

Finally, when comparing an LLC to a sole proprietor or partnership structure, you will find that the LLC is a little more difficult to form and operate. However, an LLC will offer protection for its members while a sole proprietorship or partnership will hold its owners accountable for all debts and liabilities that the company incurs. You may purchase business insurance to help protect against these liabilities, but many real estate investors opt to use a business structure that will offer liability protection due to the risks associated with real estate investing.

Summary

From a corporate structure perspective, real estate LLC benefits are second to none. Along with the simplicity of setting up a limited liability company (it’s fast, simple, and can be done by almost anyone), a real estate LLC offers significant benefits to investors in the form of personal protection and tax savings. Additionally, it provides a layer of professionalism that other investors won’t have. That said, establishing a real estate LLC is an important step for investors to not only achieve success but ensure they’re protected as well.


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