Entity Choice (Part 1): Should Your Investment Property be in an LLC?

By: Tamara B. Pow, Esq.

Choosing the right business entity for your investment real estate is an important decision with many consequences. It is crucial to work with your professional advisors, and have your professional advisors work together, to determine the correct form of entity, taking into account the type of investment, gross revenue, profit or loss, number and type of investors, lender requirements and management considerations.

For real estate, the LLC is usually the right choice for several reasons:

• It provides liability protection to its members and managers, meaning that only the funds you invest in the LLC are at risk. Your other properties, your home, your retirement accounts, etc. are insulated from the risks associated with owning the real property.

• LLC management is very flexible. No meetings or minutes are required.

• Also, there can be tax benefits. Real estate can often be transferred in and out of LLCs without income tax or property tax consequences. The flow-through income taxation means profits are only taxed once, and losses are passed through to the members’ personal tax returns, providing planning opportunities.

• For Section 1031 tax deferred exchanges, an exchanger can hold the relinquished property as an individual or trust, but acquire the replacement property as a single member LLC and it will not violate the general rule that the exchanger must take title to the replacement property in the same manner as they held title on the relinquished property.

• LLCs can also help with estate planning and family succession planning. LLC membership interests can be held in your trust and may be gifted to others at a discount.

• Additionally, lenders often require that you take title to your real estate in an LLC for asset protection and bankruptcy issues.

Even if the LLC is the right choice for your real property, there are still numerous issues to consider, including, among others: which state to form in, keeping any LLC fees low, grouping properties in LLCs or a series LLC, lender requirements, form of management and Section 1031 exchange planning. Consult an attorney to help you make the right planning decisions.

In part 2 of this series, we address situations where holding title in an entity like an LLC may not be possible or preferred. It explores alternative ownership structures such as tenancy in common and community property, and how these arrangements can affect 1031 exchange eligibility, estate planning, and co-ownership flexibility

Tamara B. Pow, Esq. is a founding partner of Strategy Law, LLP. In addition to assisting clients with entity formations and business and real estate contracts, she is a real estate investor and LLC member and manager.