Advantages of Holding Income-Producing Real Estate in a Limited Liability Company

Do you own or are you thinking about purchasing rental or other income-producing real estate?  If so, holding title to such real estate through a limited liability company (LLC) can offer asset protection and tax efficiency advantages that might not otherwise be available to you. 

What happens if the driveway to your rental property ices over during the cold Wisconsin winter and one of your tenants or their guests falls and gets injured?  If you own the rental property as an individual and the injured party brings a civil action against you, all your assets (e.g., your home, investments, savings accounts, etc.) may be at risk.

But if the property is owned by an LLC, in most cases the risk would be limited to the value of the asset(s) actually held by the LLC (i.e., primarily the rental real estate itself).  For this reason, if you own more than one rental property, it may be advisable to put each property into a separate LLC.  If a liability issues arises with respect to one property, such liability will extend only the LLC holding that particular property, thereby protecting your other assets.

You could also achieve this asset protection benefit by creating a corporation to hold the rental real estate.  However, LLCs offer more tax flexibility than corporations allow for.  In particular, if you are the sole owner of an LLC, you can usually choose to be taxed as though it were a sole proprietorship.  This means that income and capital gains from the LLC (e.g., rental income or the proceeds of the sale of the rental property) will pass directly to you.  You will pay taxes on the income or gains only once (rather than the double taxation sometimes applicable for a corporation and its owner(s)), and you will pay them at your personal income tax rate (rather than corporate tax rates).

If an LLC has more than one member (e.g., if you own the rental real estate together with one or more other persons), the LLC can be taxed as a partnership.  Again, the income and capital gains will pass through directly to the members (i.e., to you and the other owner(s)).  In either case, much of the formal structure and requirements of a corporation (e.g., boards of directors, board and stockholder meetings, elaborate corporate recordkeeping, etc.) can be avoided.

Keep in mind that there are some expenses and administrative requirements associated with forming and maintaining an LLC (e.g., the filing fee charged by the State, annual reports that must be filed with the State, etc.).  In addition, it is not enough merely to form an LLC; you must take the steps necessary to deed the property to the LLC and maintain the property accordingly (e.g., you need to change to your insurance so the LLC is the named insured).

Therefore, it is important for you to consult with a qualified attorney to determine whether an LLC makes sense for you and your unique situation.