Many real estate investors’ properties are owned by LLC’s. Such ownership structure protects their personal assets. If there is a claim or lawsuit relating to real estate owned by a properly formed and managed LLC, only the assets owned by the LLC are generally at risk. The investor’s personal assets will typically not be subject to such claim or lawsuit.
Corporations provide the similar protections of shielding one’s personal assets, but LLC’s generally allow more flexibility in management of its assets through particular drafting of the LLC’s operating agreement. Also, LLC’s do not require all the formalities found in corporate structure. Of great interest to many real estate investors is the “pass-through” taxation at the federal level. Each member reports their share of the profits of losses on their individual tax return, and no separate federal tax is assessed on the LLC itself (particular states may have additional tax treatment considerations).
If an LLC is formed after an individual has purchased property in his/her own name, the deed can potentially be transferred to the LLC entity. This process uncovers issues with the transfer of mortgages and loans (many loan documents include “due on sale” clauses activated by transfer of ownership) and also tax-related issues (potential capital gains issues if property has increased in value since original purchase). An investor should consider all the benefits and drawbacks of such a transfer before taking any action. I will submit a future post with more details on this topic.
For more information on Property Management in San Diego contact Red House Property Management at email@example.com or (858) 755-3031. Richardson “Red” Griswold (President of Red House Property Management) is a practicing real estate attorney in San Diego.