LLC: Real Estate, Forming, Advantages / Disadvantages & Taxes

Real Estate LLC – As a real estate investor, real estate LLCs can have many advantages. They also carry risks. To understand benefits and disadvantages we give you a simple overview, including all steps and explain the full process of forming an LLC. Want to set up a real estate LLC for investing? Everything from the operating agreement, taxes and loans for LLCs, and documentation is below. This is where to look.

Real Estate LLC’s: Formation, Advantages and Disadvantages

LLC is one of the entity types common for real estate investment. Say you want to invest in one of the types of real estate, but want to do it smart? LLC’s have a variety of advantages and will leave you a much more satisfied investor. It’s not all grass and sunshine though, as there are also a few risks attached to a real estate LLC.

  • Most common type of entity for real estate

Definition and Basics: Limited Liability Company – LLC

LLC is an acronym for limited liability company. They have become one of the major forms of real estate entities in recent times. They are used to purchase real estate, transfer titles of real estate, and generally changing the public record. In this case, the LLC, not the individual, becomes the owner of the real estate property.

LLC = Limited Liability Company!

Can an LLC own Real Estate?

Yes! LLC’s are very frequently used by real estate investors when buying real estate.

What Does LLC Mean in Real Estate?

In real estate specifically an LLC just means that, on paper, it is not you, the investor, making purchases or conducting business. Instead it is a company which the investor is acting on behalf of. This means that the investor is not as vunerable to any claims or other cases made from others.

  • Property owned by company not individuals
  • Less risk for investors
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Forming an LLC: How to Process, Steps

So you know that you want to form an LLC. Then the first step is to do research. Specifically, just like property taxes or mortgage tax, each state has their own regulations surrounding LLCs and investment companies. Infos can be found on your state’s website, but often, in easier words, on other websites. Once you’ve made sure that you can form your LLC the way you want to (make sure your name isn’t already taken!), it is time to file documents. The first is the ‘Articles of Organization’, which can typically be found on the secretary of state’s website, next you will create an operating agreement, which just describes how your LLC functions. At this point, it may be necessary to publish an ‘intent to file’, ask at your local newspaper! Lastly, you need a tax identification number, and business licenses.

Process summarized:

  1. Find your state’s regulations about LLCs
  2. Fill out ‘Articles of Organization’
  3. Describe how your LLC functions in the ‘Operating Agreement’ and publish an ‘Intent to File’
  4. Get your business licenses and tax ID number

Documents:

  • Articles of Organization
  • Operating Agreement
  • Intent to File (Not Always)
  • Business Licenses
  • Tax ID Number

Advantages: Should I Use an LLC to Buy Real Estate?

If you are investing in real estate, you should set up an LLC. The advantages are significant. Especially in real estate, it is not rare to encounter a lawsuit. Say someone renting your property has guests over and there is a large accident, and you are made responsible. Even if you defend yourself successfully in court, you will carry effects in the form of higher insurance premiums. With an LLC, it is not you who carries responsibility but the LLC! and you are protected. Similar story for deed and title claims, from which you are protected, and don’t forget the tax advantages! Often with holding companies, the owner(s) may encounter double taxation, but not here! Lastly, your business will seem much more professional as a company, as opposed to as an individual.

  • Protection against lawsuits
  • Protection against deed and titlee claims
  • Tax advantages
  • Looks professional!

Disadvantages: Due Sale, Transfer Tax

Now there are some disadvantages to name. Firstly, if you are making purchases in the name of an LLC, you can be at risk of the due-on-sale clause. It is a standard clause in a mortgage that requires the named property owner to pay the mortgage balance fully at the moment of closing. In this case, you should try to obtain a waiver from the mortgage lender before transferring real estate into an LLC. Another disadvantage also comes at the moment of transferring a property from individual to LLC. Namely transfer tax. In some states you will have to pay transfer tax to change a property from individual to LLC. In others though, such as New York, it is free!

  • Due-on-sale clause
  • Transfer Tax
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Real Estate LLC: Mortgage, Loans, When to Form LLC

There are a few further details to consider when thinking about an LLC. These include mortgage and other considerations. Remember! LLC’s are really only worth it when you are acting as an investor. The advantages are pretty much limited to protecting you from false claims, and therefore, do not apply when purchasing one property for yourself.

  • Only for investors

Types of Real Estate LLCs – Corporation or Pass-Through

For real estate, there are typically two broad categories which you will have to decide on. Either you want your LLC to be liability protector, in which case you will want to form it in the direction of a corporation. If on the other hand, you’re just looking to use it as a pass-through entity, to avoid paying more on taxes, you’re going to want to set it up as such.

  • Type depends on goal of LLC

Can an LLC get a Mortgage?

If you’re investing in real estate, you’re going to get a mortgage. The question is though, can your LLC obtain a mortgage? Yes! It can. In the vast majority of cases, it can get a run-of-the-mill conventional mortgagel where your (as the owner) credit report is cited. Typically, LLCs even result in relatively low mortgage interest rates!

  • Yes, you can get conventional mortgage loans under an LLC

Can an LLC get a 30-Year Mortgage?

Yes! Most definitely! But you’re going to have to look a little bit longer. Most banks only offer up to 15 years, but it is possible. If you require the 30 year (or even 20 year mortgage), you may have to file under your own name, but this is, as mentioned above, a bit riskier.

  • Yes, but these are harder to find

For a full explanation and in-depth analysis of mortgage:

Can my LLC Loan me Money?

Yes, it is possible for your LLC to borrow you money. If you are sole owner, this is not so difficult. On the other hand, with other members you will need their approval.

  • Yes, LLCs can loan members money
  • If multiple members, all have to agree
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Explanation: When to Form an LLC

If you’re not sure, the easiest way to understand whether you should form an LLC, is to just get into it. It’s an extremely complicated topic, so get ready for some research. This video below is the best way to start, explaining everything from how to when, and why to form an LLC.

Taxes: LLC Pass-Through Entity

There are many tax benefits of an LLC. As mentioned before, it is possible to get a mortgage with low mortgage interest rates through an LLC, but also that taxes can be reduced via an LLC. Remember one of the big downsides is that you may have to pay transfer tax.

  1. Pass-Through Taxation
  2. How to be Taxed

Pass-Through Taxation

Establishing a real estate LLC allows businesses to avoid direct taxation. This meanss that investors report profits or losses of the business on their personal tax returns. The business owners wll then usually pay a lower tax rate and avoid double taxation.

  • LLC prevents double taxation

How to be Taxed as LLC – Partnership or Corporation?

That’s not all though, investors, before forming their LLC will be able to decide in which form they will be taxes. Broadly, these are the three optionss:

  1. Single-Member LLC: taxed through personal federal tax return
  2. Partner LLC: taxed like a partnership
  3. Corporation LLC: taxed as a corporation

LLC Summary: Limited Liability, Many Advantages

In short, LLC’s are useful if you are a real estate investor. They protect you from lawsuits, have many tax benefits such as avoiding double taxation, and more. Although they are complicated, a serious real estate investor will want to get in on this.

  • Good for taxes and avoiding liability
  • Complicated process