Benefits of an LLC for Real Estate Investments

Benefits of an LLC for Real Estate Investments

Investing in real estate can be a very good strategy for creating a sustainable income stream for your estate plan. Though, real estate investments also creates inherent liabilities. Whether you invest in homes or apartments, areas such as laundry rooms or staircases, they all carry great risk of exposure. Even tenants themselves carry the risk of exposing you, the owner, to liability from potential environmental-contamination claims, fire-related claims, slip-and-fall claims and other injury claims. This is why steps should be taken to protect yourself, such as forming a Limited Liability Company (i.e. LLC).

An LLC can be a great form of asset protection. An LLC is known for combining the best attributes of a corporation and a partnership. How? Well, an LLC allows you to protect your personal assets (including your primary residence) from claims by creditors against the LLC. So basically, you get personal liability protection.

Generally, the only risk in a lawsuit against an LLC is each owner’s investment in the LLC. This means you could establish multiple LLCs for different real estate investments in order to segregate your “problem assets” from “premium assets.” But keep in mind, an LLC owner is not exempt from legal action for fraud or negligence claims.

There are also tax benefits to owning an LLC. For example, an LLC is classified as a “pass-through” company. This means income from an LLC is passed through to its owners. You claimed this income on your individual tax return. So basically, this pass-through income is subject only to capital gains on the ownership shares of the member, and not to corporate capital gains taxes, so there’s no double taxation. But watch out – an LLC with a single owner-member is taxed as a sole proprietorship.

Even though LLCs have many benefits, you also have to be aware of some of the drawbacks. First, setting up an LLC can be expensive and time consuming. An LLC is also at risk of dissolving if a member dies or withdraws from the LLC. You also have to factor in the various state laws that govern LLC formation and management. The maintenance and upkeep of an LLC is also imperative to keep the creditor protection in place. All of these are reasons you should contact an experienced estate planning and business formation attorney to get some guidance on how to properly establish an LLC in your state.