If you are considering adding real estate to your investment portfolio or selling real estate to boost your income, what business structure should you choose for your company? While there are a few options available to you, the best structure for most people is going to be a LLC or limited liability company.
What Is a LLC?
A LLC is a limited liability business structure that splits your personal assets from company assets. If you were to be sued by a tenant or by someone who purchased a home from you, that person would only be able to get at your business assets. For those who run their business from home, this protects their home, car and other assets that could otherwise be liquidated in a lawsuit.
Why the LLC Structure?
The LLC structure is the easiest to create. All you need to do is file Articles of Organization with your state. Once the paperwork is filed, you are officially a limited liability company. Another benefit to this structure is that you can from a series LLC to keep each property separate from each other. This means that if a tenant sues, they are limited to the assets delegated to that property.
You Gain Flexibility as a LLC
The LLC business structure comes with a handy tool called check the box taxation. This means that your LLC can be taxed as a sole proprietorship, a partnership or as a corporation. By default, your LLC is treated as a sole proprietorship for federal tax purposes. For most people, that will be good enough because you don’t usually have to pay self-employment taxes on rental and real estate income because real estate activity is considered to be a passive activity in most cases.
Start a LLC IRA
One of the attractive aspects of investing in real estate is that you can use a self-directed IRA to buy and sell real estate. Using this structure allows you to bypass paying capital gains taxes. A self-directed 401k may give you the option to take money out of it in the form of tax-free loans to help you fund the purchase of a personal residence or investment properties.
Those who are thinking about investing in real estate should form a LLC to protect their investments. Personal property is protected, you gain flexibility in how you are taxed and you can create a retirement vehicle that saves you money now while helping you fund your retirement.