Saturday, August 11, 2012

Protect real estate investments with an LLC

Protect real estate investments with an LLC
Dear Real Estate Adviser,
I operate a small real estate investment business and am trying to determine if there is any value -- economic, legal, tax or other -- of owning your personal home through a limited liability company? What about owning rental properties through one?
-- John
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Dear John,
You've got things flipped around a little here. If you're a business owner, a limited liability company, or LLC, structure can protect your home and other personal assets from court judgments. But the house itself, as your personal home, wouldn't fall under such a corporate structure.
However, you can form a company owning real estate that could be served quite well under the LLC flag.

Rental-property ownership, as you probably realize, is fraught with inherent financial risks such as potential environmental-contamination claims, fire-related claims, slip-and-fall claims and other injury claims. A lot of owners of income-producing real estate like to operate under an LLC because their personal assets, such as stock, bank accounts, vehicles and their other LLCs, aren't at risk if an accident or other incident occurs on premises or if undesirable flaws in it suddenly surface.

Generally, all that is at stake in a lawsuit against an LLC is each member's investment in that LLC business. Often, owners of multiple properties split them up into separate LLCs to segregate their problem assets from their premium assets. Of course, LLC owners -- or "members" as they're called -- are not exempt from personal actions of fraud or negligence. But that doesn't keep some fly-by-night builders and other bad-faith operators from hiding behind them, unfortunately.

LLCs allow for flexible profit distribution among their members. They also provide a veneer of personal privacy when a plaintiff attorney is doing an asset search in anticipation of filing a lawsuit.
On the tax side, an LLC benefits greatly from its classification as a "pass-through" company, which means its income is passed through to its owners and claimed on those owners' individual returns. Hence, it is subject only to capital gains on the ownership shares of the member, and not to corporate capital gains taxes, so there's no double taxation. LLCs with just one owner-member, however, are taxed as a sole proprietorship. LLCs are certainly not headache-free. They can be relatively expensive and complex to set up and may be dissolved if a member dies or withdraws. Some states have unique laws that govern LLCs.
But if you're


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