Why Use An LLC for Real Estate Investments
There are a number of reasons why the limited liability company, or LLC, has become increasingly popular for the purpose of owning of real property. The benefits and protections afforded by an LLC often far outweigh the costs and burdens of forming and maintaining an LLC. While each situation is different, there are a number of clear and common reasons to use an LLC over a corporation. One of the most obvious benefits of an LLC, like a corporation, is that it limits the personal liability of its members. However, unlike a corporation, where shares of stock are attachable by judgment creditors, interests of LLC members are not attachable. In an LLC, the owners’ exposure to liability is insulated by the protection of the LLC. Another advantage of an LLC is the benefit of pass-through taxation, whereby the business income “passes through” the business to the owners’ individual tax returns. Pass-through taxation applies to a single member LLC or one formed with two or more members, which are by default taxed as a partnership. Single-member LLCs are taxed as a sole proprietorship, and thus no separate tax return is required. These tax classifications enable real estate owners to avoid double taxation on the income generated by the property and the appreciation in the value of the property upon disposition. Single member LLCs also provide the convenience of not having to file a separate tax return and the activities of the LLC can be reported on Schedule C of the individual return. Furthermore, in a 1031 Exchange, a single member LLC can dispose of real estate held under one LLC and purchase under another and still meet the statutory tax deferral requirements as the transaction is tracked by the federal identification number of sole member and not the identity of the …
