LLC for Real Estate: Reasons for Forming a Real Estate LLC

An LLC, or limited liability company, is a business structure and legal entity that provides asset protection and tax benefits for the business owner. Generally, a person will need to pay a filing fee to start an LLC and an annual fee to renew this status.

A real estate LLC is a business entity geared toward ownership of real estate assets. This kind of structure can make owning real estate holdings far less stressful for entrepreneurs, investment property owners, real estate investors, and regular homebuyers. An LLC of this kind can be a regular real estate business looking for tax breaks, a multi-member endeavor for people hoping to own investment property together, or the work of a single first-time property owner to protect their personal finances and assets if legal issues should arise with their real estate.

Many single-member LLC owners form a real estate LLC to give liability protection to their own personal assets. The LLC structure enables them to hold their assets under the LLC name rather than under their personal name. In this case, if legal issues were to arise, only the assets under the business name can be on the table for potential seizure through the legal system. Some individuals might even choose to form separate LLCs for different assets.

For instance, say you are a landlord and you do not have your own LLC. If a disgruntled tenant sues you, your own personal assets and finances will be on the table as you are personally the rental property owner. Alternatively, if this type of real estate investing business technically owns your property instead, your LLC and business bank account would take the hit and none of your personal assets would be in danger.

Keep in mind, there is no type of liability insurance—including filing as an LLC—that you can consider a license to commit egregious wrongdoing. Courts can still make a determination to “pierce the corporate veil” and go after your personal assets in particular scenarios.

There are a few benefits to starting a real estate LLC as either a homebuyer or real estate investing business. Here are four benefits to consider:

1. 1. Ability to file in a different state: You can technically file an LLC in a state other than your home state. For instance, state laws in Nevada and Delaware are more lenient with real estate LLCs than the laws of other states. Filing as a real estate LLC in a different state may come with additional fees and paperwork, but it could pay off in more ways than one.
2. 2. Different loan terms: Lenders often offer different loan types and interest rates to businesses than individuals. Since LLCs are technically a type of company—even if they sometimes only represent a single person—you might find you’ll receive preferable home loan offers if you register as one.
3. 3. Personal liability protection: Perhaps the most common reason individual homebuyers file as LLCs is to shield their own assets and finances from legal issues. By filing as an LLC, you’ll be able to rest easy knowing your own personal assets are completely separate from whatever’s under your LLC’s name. If you file as a sole proprietorship, however, you will not receive this liability protection.
4. 4. Tax purposes: It can be useful to keep your real estate transactions in an LLC for tax purposes. You won’t have to worry about double taxation so long as your real estate holdings are in the name of your LLC—the Internal Revenue Service (IRS) will know to only tax your LLC and it won’t impinge on your personal taxes. In contrast, this isn’t the case if you file as a C corp or S corp. Additionally, depending on federal and state laws, you could see some other tax breaks on your income tax return as well.

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