Should You Form an LLC for Real Estate Investments?

Should You Form an LLC for Real Estate Investments?

Florida was an early adopter of the limited liability company (LLC) business structure to insulate business owners — and real estate investors — from personal risk exposure. This is why forming an LLC for Florida real estate investments has proven so attractive to investors for over 35 years.

Although some real estate investors may elect to rely solely on liability insurance to protect them from a potential lawsuit, there are some risks to this approach. Liability policies generally have exceptions and limits that do not wholly protect investors from litigation; an LLC’s protective power is typically broader and more beneficial for the following reasons:

Pass-through taxation. Real estate holding companies are classified by the IRS as sole proprietorships. Income and capital gains from a single-member LLC “pass through” to the owner, who then pays taxes as an individual. Unlike corporations that must pay a corporate tax, there is no LLC tax, so the owner avoids double taxation.

Management. LLCs have greater flexibility than partnerships or corporations when it comes to delegating management responsibilities. LLCs can be managed by one or multiple owners or even third-party managers.

Profit distribution. The LLC’s operating agreement dictates how profits will be distributed, and there is no requirement as with an S-corporation for a pro rata distribution. Members can take profits according to their investment or even the sweat equity they have put into the properties.

Foreign ownership. An LLC allows foreign nationals to invest in U.S. real estate, whereas an S corporation does not.

Ownership transfer. LLC owners have the flexibility to transfer ownership shares in the LLC through gifting or inheritance without the need for executing and recording new deeds.

Forming a real estate holding company as an LLC is best done early on, since trying to transfer existing real estate investments into the LLC may require the consent of your lender. While there is no way to completely eliminate the risks of investing in real estate, investing via an LLC will limit your personal liability and provide advantages that make it a desirable choice for investors.

The attorneys at Jurado & Farshchian, P.L. combine their knowledge and experience in the South Florida real estate market with a commitment to personalized, detail-oriented legal services. Contact one of our experienced Florida real estate attorneys at (305) 921-0440, or email us at info@jflawfirm.com.

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