Attorney Cloud Peak Law
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Couple buying a home

The Pros and Cons of Buying Real Estate as an LLC

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Many people investing in real estate for the first time are wondering whether they should do so under LLCs, since they can provide tax advantages and limit liability while building wealth. In this article, Mark Pierce discusses the pros and cons of purchasing property as an LLC so you can help your client make the best choice.

Aug 25th 2021
Attorney Cloud Peak Law
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Investing in real estate is a great way to build wealth, and it’s a strategy that is increasingly used by businesses, rather than individuals. Because of this trend, many individuals who are interested in investing in real estate for the first time may be wondering whether they should buy an investment property in their own name or in a limited liability company, or LLC.

Unfortunately, there’s no simple answer. There are a multitude of factors that your client should consider, such as whether they have prior experience in real estate investing, what they intend to do with the property, whether they have an exit strategy and the risks associated with owning property. Reviewing the pros and cons of investing in real estate should prepare you to help your client make this decision.

The Benefits of an LLC

An LLC is a business structure that limits liability, meaning that the LLC’s assets and liabilities are separate from the business owner’s personal assets. If something happens to the business, such as a lawsuit or bankruptcy, only the business assets are liable, thereby protecting the business owner from losing their home or car, for example.

Should your client choose to purchase real estate and become a landlord, the primary benefit of holding property under an LLC is that the tenants can sue only the LLC and not your client should something happen. There are exceptions in extreme cases of fraud or neglect, but the bottom line is that the rental properties would be the only assets at stake in case of a lawsuit. It’s even possible to form separate LLCs for each property to further reduce liability.

There are other advantages of holding a property under an LLC. For one, it’s easier to invest with partners in an LLC or to add an additional member by selling a percentage of the LLC. There are also tax advantages to be had by working with an accountant or a lawyer. Finally, forming an LLC allows the owner to separate their real estate income from any other income, making it easier to keep track of real estate activities.

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Replies (4)

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By Kent in Long Beach
Aug 27th 2021 00:10

If rental is held in a SMLLC and the member dies, is there a step-up in basis?

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Replying to Kent in Long Beach:
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By SkinnVinny
Aug 30th 2021 04:22

That's a good question. I'd imagine there is a step-up in basis for the LLC membership interest itself, which is substantially the same result.

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By bookielou
Aug 28th 2021 00:37

You missed a BIG ONE regarding disadvantages of using an LLC to buy real estate; that is, if a personal residence is involved (perhaps part of it is a rental), THE RESIDENCE IS DISQUALIFIED FROM THE PERSONAL-RESIDENCE PROFIT EXCLUSION. Have seen attorneys do this, much to the owner's demise if it is ever sold. Title must be held in name of individual(s) to qualify for residence-sale exclusion (Sec 121).

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Replying to bookielou:
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By SkinnVinny
Aug 30th 2021 04:25

Good point. I'd imagine, time permitting and no rush to sell, the ideal solution would be to move the property out of the LLC and back into one's personal name, reside in it for at least two years, then sell to take advantage of the gain exclusion.

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