Investment properties can create liabilities as any rental-property ownership is usually tied down with
intrinsic financial risks. It is always advisable for precautionary measures to be taken to protect the
investor and his or her investment, and forming an LLC may very well be the first step in sound risk
management. A limited liability Company, or LLC, is presently the favored asset protection means for
most real estate investors. As an LLC combines the best attributes of a corporation and a partnership,
with it, the investors’ personal assets, including the primary residence, are generally protected from
claims by creditors of the LLC. The investors gain personal liability protection, tax advantages and other
benefits, as well.
A lot of owners of income-producing real estate like to operate under an LLC because their personal
assets, such as stock, bank accounts, vehicles and their other LLCs, aren’t at risk if an accident or other
incident occurs on premises or if undesirable flaws in it suddenly surface.
The primary attraction of the partnership form is pass-through taxation. In the early years of a real
estate investment, high interest payments and depreciation create tax losses. When the property is held
in an entity that is subject to pass-through taxation, the investors get to take the tax losses on their
personal tax return, and thus they get to build equity and have positive cash flow while reducing their
taxable income. In addition, the property will also be appreciated at the same time.
Many a times, LLCs are the preferred entity for ownership of investment real estate. For LLCs, there is
generally no tax liability incurred on contributing assets into or distributing assets out of the LLC to the
members. This flexibility is one of the primary reasons an LLC is the favored entity for holding title to
investment real estate. Corporations are usually disfavored for holding title to investment real estate as
the property cannot be distributed out of the corporation without triggering a taxable event. Holding
investment real estate as an individual or general partnership does not provide limited liability
protection. Llc taxation can be greatly simplified with the help of a tax expert.
If you are one of the many investors in real estate you should consider holding your investment property
in a limited liability company rather than personally. The benefits of holding title to investment property
in an LLC include limited liability protection, pass-through tax treatment of profits and losses, and the
ability to transfer property in and out of an LLC with minimal tax consequences.
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