Forming a Real Estate LLC to Buy Investment Property

In order to protect personal assets and save thousands of dollars, many people are transferring the ownership of real estate and other assets to an LLC. A Limited Liability Company cannot be held responsible for personal debt and lawsuits. For this reason, creating an LLC is one of the most popular asset protection methods used today.

A limited liability company, or LLC, is similar to a partnership but has the legal protections of personal & real estate investing assets that a corporation offers without the burdensome formalities, paperwork and fees. The exact rules for forming an LLC vary by state.

The good news is, you can protect yourself and sleep easy at night, knowing you have an iron-clad legal fortress around you – you’ll also save thousands each year on tax deductions because of it. First, let me go over a couple of aspects you’ll need to know about protecting your investing property assets.

LLC’s & Real Estate Assets

All personal and investment real estate, including primary and vacation homes, can be included as assets in an LLC. This allows all residences and real estate to be protected from seizure. Also, an LLC can be created with a single member, a single owner, and still be a valid asset shelter. If a real estate loan is required, the LLC may be eligible for special loan terms.

You don’t have to hire a lawyer to set up an LLC, since state requirements are usually self explanatory. But it’s a great idea to have one read over paperwork and your operating agreement to make sure your interests are protected along with your business partners.

Privacy, Control, and Inheritance
In addition, the ownership of any transferred asset is difficult to track and locate. Moving your assets to an LLC does not mean that you will lose control of your assets. In fact, you retain complete control of every asset, especially if you have a single-member LLC. To reduce inheritance tax and problems, simply add your family member(s) as owners of the LLC. This allows the assets to flow directly through to your heirs without paying exorbitant inheritance taxes.

Pitfalls of LLC’s
If a lawsuit is filed against the LLC, the property or other assets can be seized under any judgment. If the LLC has more than one member, or owner, any lawsuit brought against any owner can affect the entire LLC. A lien could be placed against the LLC, and cash distributions must still be disbursed equally. Finally, personal expenses cannot be paid by the LLC directly or the LLC loses its limited liability status. The court could argue that paying personal expenses makes the LLC invalid and that the member illegally transferred assets to the LLC as a shelter.

Similar to sole proprietorships and partnerships, LLCs are taxed by a pass-through tax system. Unlike a corporation, which encounters double taxation and must file tax returns separate from an individual’s income tax, the LLC is only taxed once.

The pass-through tax system allows an LLC’s income taxes to be included on the personal income taxes of its members. Listing your assets as LLC assets also allows you to take added tax deductions that are not available if you do not have a business.

Forming an LLC

To create an LLC, you file “articles of organization” (in some states called a “certificate of organization” or “certificate of formation”) with the LLC division of your state government. You can usually go online or in person to your local secretary of state’s office to file the paperwork. Filing fees range from about $100 to $1,000, generally.

Many states supply a blank one-page form for the articles of organization, on which you need only specify a few basic details about your LLC, such as its name and address, and contact information for a person involved with the LLC (usually called a “registered agent”) who will receive legal papers on its behalf. Some states also require you to list the names and addresses of the LLC members.

In addition to filing articles of organization, you must create a written LLC operating agreement. You don’t have to file your operating agreement with the state, but that doesn’t mean you can get by without one. The operating agreement is a crucial document because it sets out the LLC members’ rights and responsibilities, their percentage interests in the business, and their share of the profits.

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