The Benefits of Forming an LLC for Holding Investment Properties

Over the past decade, investors have flocked to the real estate market. From house flips to rentals, a real estate investment can be a lucrative way to get more out of your extra income. However, when making an investment of this magnitude, it is essential to ensure that you are taking the path for best return. For many, this path might include forming an LLC to hold these investments.

What is an LLC?

LLC stands for “Limited Liability Company.” It is a separate entity formed to separate personal and business operations and limit personal liabilities that may occur.

Why Form an LLC? 

As mentioned before, an LLC keeps a divide between personal and business affairs. There are a variety of reasons people find this separation to be helpful when accumulating investment real estate: 

 

• Liability Protection- Real estate is a significant investment, and like all significant investments, the payoffs can be huge, and so can the losses. When someone enters this market, they are prepared to gamble, however, they may be less likely to gamble with their family’s values. By investing under an LLC, you are personally protected from most liability claims that may arise with the property. For instance, if you rent out the property, and the renter gets injured on the property, they may file a lawsuit. If the property is held by an LLC, the suit will be filed against the LLC rather than against you personally, as an individual. 

• Company Shares– Many people prefer to enter an investment with a trusted partner rather than taking on the entire gamble on their own. By forming an LLC, you can sell shares of the company to let multiple people in on the benefits and losses that the investment might experience. Additionally, creating a business operating agreement for the LLC partnership will allow a clear understanding of roles and expectations of the business and partners involved. 

• Tax Write-Offs– No one likes a fight against the IRS, and while you can write business expenses off on your personal taxes, it can get a lot more complicated. For example, you may write off your cell phone plan because you use it for business, but you may be questioned if you also use the cell phone for personal use. Writing off expenses, under and LLC, tends to simplify the process, and allow you to get a fair return for expenses with less of a fight. Keeping expenses separate and clean under and LLC allow for better track of business and personal expenses when filing an annual tax return.  

 

When an LLC is Not The right Fit

While there are many benefits of forming an LLC to invest in real estate, there are also times when this option may not be the best fit for your unique interests:

 

• Owner Occupied Residences- Many investors find luck by investing in multi-family homes or duplexes where the investor will occupy one of the homes and rent out the other unit. While this can be a successful business model, you may run into trouble securing financing for this plan under and LLC because you will be occupying the home. Additionally, individual tax benefits for an owner-occupied home outweigh the tax benefits of an LLC. 

 

Whether you are thinking about purchasing your first investment property, or your third, it is important for you to discuss your options to help ensure that you get the best deal while also avoiding any legal or tax consequences. A real estate attorney is an essential role in the process.

Contact Tannehill Law today if you are seeking professional legal guidance to assistance you in your next real estate investment.