By Lane V. Erickson, Attorney
I’ve been a real estate and business lawyer for over 17 years. During this time I’ve represented a number of investors who own rental properties or other types of investment real estate. More importantly, about 10 years ago, I purchased my first investment property. Since that time I’ve purchased several more investment properties. Through my experiences of being an attorney representing investors, and by being an investor, myself I’ve learned several things about the importance of having an LLC involved as a part of a real estate investment plan. Here are three reasons why every real estate investor should have an LLC.
1. An LLC Limits Personal Liability
The most important reason for having an LLC is to limit your personal liability. What this means essentially is that if liability arises associated with your real estate investment the liability will stay with the LLC and will not pass through to you individually. This means that other investments, bank accounts, cars, homes, and any other assets owned by you personally will not be at risk for any liability that arises in your real estate investment business.
The classic example is that somebody slips on ice and gets hurt. In this instance the only liability that exists would be with the LLC owning the real estate investment. If a lawsuit commences only the LLC can be named as a proper defendant in this case. So if a judgment were entered that wiped out your real estate investments, it still would not pass through to you individually and put at risk your other assets.
2. An LLC Can Provide Tax Advantages
The second reason for having an LLC in a real estate investment business is that it provides a number of tax advantages. The most important tax advantage that LLCs offer is the pass-through tax. What this means is that rather than being double taxed like many corporations are, the tax passes through to the individual owners of the LLC, based upon their percentages of ownership and is declared on their individual income tax filings. The same is true of any losses that occurred to the business. These pass through the LLC to the individual owners and are declared on their individual income tax reports.
3. Flexibility in Transferring Real Estate to Family Members
A third reason for creating an LLC in your real estate investment business is that it allows you to pass your real estate investments on to your family members without causing a transfer transaction. Normally when an owner of real estate transfers that real estate to another person there is a transfer transaction. This can result in a capital gains tax and other taxes that might arise. However when a real estate investment is owned by an LLC and the ownership of the LLC passes from one family member to another this is not generally considered a transfer transaction. The reason is the owner, which is the LLC, is still the owner of the property.
These are just three of the main advantages for having an LLC as part of a real estate investment business. There are other advantages that aren’t mentioned here. After more than 17 years as a business and real estate attorney, and a decade as a real estate investor myself, experience has convinced me that it is wise for every real estate investment business to have an LLC.
Call us toll free at 877-232-6101 or 208-232-6101 for a consultation with Lane Erickson and the Racine Olson team of Business Law and Real Estate attorneys in Idaho. You can also email Lane Erickson directly at email@example.com. We will answer your Idaho Business Law and Real Estate questions and will help you solve your Idaho Business Law and Real Estate problems.