Wednesday, October 31, 2012

Why Purchase Property under an LLC?

There are several reasons to purchase property under an LLC as opposed to your real name.  Many people use LLCs to purchase property in order to hide their identity.  A recent article in The Wall Street Journal by Alyssa Abkowitz points out the fact that “when set up properly” deals constructed under legal entities are “virtually untraceable.”  The article went on to state that in the last year 27% of U.S. homes that sold for over $5 million were bought by LLCs.  That number drops off significantly as the sales price decreases.   Given the difficult economic times over the last few years, many buyers of expensive properties want to hide their true identities to avoid the potential for negative publicity over extravagant purchases.  There are other advantages to using an LLC that the average person can take advantage of when purchasing property. 

Protection from Personal Liability

The article explains that one of the key protections offered by an LLC is the legal protection from claims against you personally that arise out of the property.  The prime example being if someone is injured while on your property, the person would have to sue the LLC as the property owner and not you personally.  Your personal assets are protected from such a claim as long as the LLC is set up correctly.  It is wise to use an attorney to set up an LLC for real estate purposes to ensure that you are protected.   The liability advantage is used by a full spectrum of real property owners.  Large investors who hold extensive portfolios of residential and commercial rental space utilize the LLC to avoid potentially devastating lawsuits arising from any one of their many tenants.  Families who own a vacation home that doubles as a rental income generator utilize the liability protection to make sure a careless spring break renter does not come after their personal assets over an injury that occurred at the home.  This protection gives more individuals the peace of mind to own rental properties because they know that their liability is limited to the LLC’s holdings and insurance policies.     

Taxes Advantages

LLCs have “pass-through taxation.”  Any profit or loss associated with the property is passed through the LLC and onto the individuals who own the LLC.  These individuals report the gains or losses on their personal tax returns thus providing opportunities for additional tax advantages.  The capital gains tax rate is lower on a single-owner LLC than on other entities according to David Hryck, an international tax expert quoted in the article.  So if you use property for rental income or other investment purposes, it is to your financial advantage to do so under an LLC.

“Funnel” Expenses through the Entity

With any property, there are expenses to pay.  A member of the LLC can funnel property related expenses through the entity.  This is helpful for tax purposes as well as maintaining the financial independence of the LLC from the individuals.  Expenses like maintenance, homeowner-association fees, taxes and utilities should be paid from the LLC’s account.  You want the LLC to operate as an independent entity and not be too closely tied to you personally or you might lose some of the legal protections afforded an LLC.

What are the Disadvantages?

Not every purchase is eligible for an LLC.  Lenders have different rules for loans given to LLCs versus private individuals.  In some instances, the rates and required down payments are higher for an LLC loan versus a private loan.  Some lenders go as far as not allowing buyers to finance certain types of purchases through an LLC.  There are also certain filing requirements associated with LLCs that must be complied with each year.  Different states have different regulations regarding annual reporting fees and taxes so you should consult with an experienced real estate attorney to ensure proper compliance.

Buying through an LLC is not for everyone, but more real property buyers and owners could benefit by utilizing the advantages offered by this option.  The housing market presents multiple challenges for investors or buyers of all budgets so it is important to know all of your options that might lead to increased success.

See Our Related Blog Posts:
Turning the Corner on the Housing Market
The Anatomy of a Foreclosure


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