Transferring Real Estate Investment to Corporation

Q: I currently own a rental property and would like to transfer the title from myself to my corporation. What are the steps for doing this and what are the benefits and disadvantages of doing this?
 

A: For the vast majority of rental property owners, owning the property in their own name is the standard. However, holding title in the name of a corporation has certain advantages and disadvantages.

The advantages of holding a real estate investment in a corporation or limited liability company is to insulate the shareholders from lawsuits that may come about from the ownership of the property.

If you have insurance on the property, the insurance will pay for matters that are covered by the policy but only up to the amount of the policy. If your policy is for $500,000 and there is a judgment against you for one million dollars, you will be on the hook for the balance of the money. If you owned the property in a corporate entity, you might lose the property to the lawsuit, but you would not lose other assets that were not owned by the corporate entity.

The corporate entity would shield your personal assets and the assets that you might own under different corporate names.

In some instances there are tax advantages to owning property in a corporate entity. Depending on how many properties you own and what the cash flow is, holding property in one or more corporate entities can give you additional tax benefits. You should consult with your tax accountant to discuss these benefits.

Unfortunately, if you hold a property in a corporate entity, you will have additional expenses in filing fees with the state in which the corporate entity is created, in some cases, in additional expenses to file separate tax returns for the entity, and in legal expenses in suing tenants and other parties that may be involved in litigation with you. Some states require corporate entities to be represented by an attorney in any court cases even if the owner believes that he or she can handle the case herself.

With a corporate entity you need to make sure that all business is done under that corporate entity’s name. That means keeping a separate set of books and financial accounts for the corporation, and making sure you market the building under the corporate entity.

You don’t want to through the expense of having a corporate entity and then having someone claim that the entity didn’t really exist because you never kept books for the entity, you always marketed the property in your own name and never gave anybody the indication that the property was owned by the corporate entity.

If you decide to transfer title to a corporate entity, talk to your accountant first. Find out if there will be any negative tax consequences to the transfer of the property to a corporate entity.

If there will be negative tax consequences, you might want to transfer the next property you buy into the corporate entity. Once you have determined that you have no negative tax consequences to the transfer, you then need to make sure you won’t have any transfer taxes and other costs to pay to transfer the property.

If you live in a state that allows the transfer of the property at a nominal cost, you can have your attorney draft a deed transferring title of the property from your name into the name of the corporate entity you have created.

Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce R. Glink’s latest book is 50 Simple Steps You Can Take To Sell Your Home Faster and For More Money In Any Market. If you have questions for them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022 or contact them through Ilyce’s website www.thinkglink.com