Should You Use an LLC for Investment Property?

Investing in real estate may offer certain income tax advantages and is a great way to build wealth. If you are interested in investing in real estate you may be wondering whether you should buy an investment property in your own name or in a limited liability company (LLC).

Unfortunately, there’s no simple answer. Considerations include what you intend to do with the property, what is your exit strategy and the risks associated with owning property. Reviewing the pros and cons of investing in real estate should prepare you to make this decision.

The Benefits of an LLC

An LLC is a business structure that limits liability, meaning that the LLC’s assets and liabilities are separate from the business owner’s personal assets. The business owner gains some protection from losing their home or car in the event of a lawsuit or bankruptcy.

As a landlord, the primary benefit of holding property under an LLC is that tenants and others on the property can only sue the LLC and not you should something happen, except in cases of neglect or fraud. You may consider separate LLCs for each property to further reduce liability.

Other advantages of holding a property under an LLC, including tax advantages to be had by working with an accountant or a lawyer. It is also easier to transfer ownership interests in the property by selling interest in the LLC. An LLC allows the owner(s) to separate their real estate income from any other income, making it easier to keep track of real estate activities.

The Challenges of an LLC

Mortgages for an LLC are more difficult to obtain, interest rates are generally higher, and larger down payments are expected. In many cases, the bank will not approve a mortgage unless you provide personal assets as collateral, which defeats much of the purpose of forming an LLC. You won’t be able to take advantage of various government programs designed to promote homeownership.

There are expenses and hassles to setting up an LLC. The filing fees range anywhere from $40 to $800 depending on where the property is located. There is also the cost of hiring an accountant or lawyer to make sure that the LLC is set up. You will also need to pay an annual fee to maintain the LLC, and file separate tax returns unless the LLC is considered a disregarded entity.

How to Buy Real Estate in an LLC

It is important that you have your LLC set up well before you buy a property. A delay while you form your LLC may lead the seller to look elsewhere, or if purchased in your name the property will have to be transferred to the LLC. This may result in additional legal and transfer costs and require refinancing if mortgaged.

You may need to submit personal documents proving your own income, as the LLC will not yet have income or tax records as proof it can pay. The property will be titled in the name of the LLC.

Final Considerations

If you’re still unsure, consider the following questions:

·        How much property do you intend to own? If you intend to own a single property and rent it out, buying as an individual could be simplest. If you plan to own multiple properties, the increased protection of an LLC becomes more significant.

·        How much money do you have? The lending requirements are stricter when buying a property as an LLC, and a larger down payment is required.

·        What is your long-term plan with this property? Do you intend to cash out your property someday, or do you plan to leave it to your children? An LLC can make it easier to pass properties on to heirs if certain steps are taken in advance.