If you’re just starting out as a real estate investor, you probably hold title to rental properties in your own name, but that’s usually not to your advantage. There are several reasons real estate investors choose to create limited liability companies (LLCs) to hold their investment rental properties, including:
- Liability protection.
- Tax flexibility.
- Privacy concerns.
- Strategic ownership structures.
Sometimes, it’s easy for me to forget that not everybody is as passionate about business law as I am. As I sat down to write this article, I had to convince myself that there’s just too many technicalities and too much legalese to give you a complete picture of LLCs in a single blog entry. (Unless you want to know what it’s like to study for a law school exam.) Here are the basics that you should consider when deciding if an LLC is right for you for your real estate investments.
LLCs protect you from real estate liability.
For most investors, the most valuable quality of the LLC is the liability protection it provides its owners. LLCs allow you to separate your personal assets from your business assets, which gives you protection from LLC debts and also protects the LLC from your debts. This separation means that if real estate owned by your LLC is at risk from litigation or creditors’ claims, your personal assets will not be at risk (with a few exceptions). By taking careful steps toward distinguishing your personal property from LLC holdings, you can utilize the LLC to provide greater protection against personal liability.
LLCs have flexible tax options.
Another factor you should consider is the tax impact of creating an LLC. Single-member and multimember LLCs that hold real estate can enjoy the benefit of pass-through taxation. In some cases, transferring your real estate into an LLC may not have a significant or immediate effect. However, you may have significant tax issues to consider depending on how many owners your LLC has, whether you have a mortgage, and the value of the property.
LLCs protect your privacy.
Creating an LLC can provide greater opportunities to keep information about what you own private, especially when coupled with a living trust. Property ownership in Texas is a matter of public record; some counties even have free searchable websites for tracking down property owners. The attorneys at Leigh Hilton, PLLC will help you structure your business so that the public at large cannot learn about what you own. This can be a helpful asset protection strategy if you could ever be involved in litigation or if any of your properties are exposed to risk.
LLCs can be tailored to fit your specific real estate needs.
Finally, one of the most important benefits of the LLC is the opportunity to tailor the structure of your business. This means that you can define how you will split profits and losses, how decisions will be made, and how your company will be owned when you retire or if you pass away. These are just a few ways you can enjoy the flexibility provided by an LLC, but there are many more. Some people create multiple entities, with one LLC focused on the management of the real estate while the other LLC or subsidiary LLC owns the assets. From determining your LLC’s tax structure to deciding whether to have annual meetings, the attorneys at Leigh Hilton, PLLC can help you design your company’s structure so it will function in a way that makes sense for the assets it owns.
We Can Help
If you are interested in exploring the use of an LLC for your real estate rental properties, or if you’d like to hear more, we can help. We have a team of talented attorneys ready to help you design your LLC and structure it in a way that provides the most protection for you and your assets. Schedule a virtual or in-person meeting with us today.