LLC vs Corporation: Is An LLC Better For Real Estate Investing

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Summary: LLC vs Corporation: Is An LLC Better For Real Estate Investing Most people prefer an LLC for real estate investing. But some accountants still recommend that their clients use an S Corporation to invest in real estate. LLC, or limited liability companies, have become the method of choice for real estate investors. Most states have laws that permit the use of limited liability companies or some other company structure that is similar to an LLC.

LLC vs Corporation: Is An LLC Better For Real Estate Investing

Q: I currently have one rental property and am in the process of looking for a few more. My accountant has advised me to form an S-Corp for my rental investments, which I am currently setting up.

I have read several articles advising real estate investors not to hold investment properties in an S-Corp but rather in a limited liability corporation (LLC). What is your opinion on this? I also have a full time job making around $70,000.

A: Real estate attorneys often set up LLCs for their real estate investor clients because it allows for additional flexibility in terms of structure and for federal income tax purposes.

LLCs have a general manager and then other members who can own various pieces of the limited liability company (LLC). An LLC shields its members from claims from creditors and other types of litigation. Most importantly, an LLC can allow for income and losses to flow directly to the members, without also being taxed on the corporate level.

If you’re buying a lot of real estate, you’ll want to make sure the property is held in the name of the LLC or corporation otherwise the liability shield won’t work. On the other hand, if you do that, you might find that it’s more difficult and more costly to finance the purchase of these properties.

If you’re planning to take investment properties you already own and transfer them into an LLC, you may run afoul of your mortgage lender’s rules. You may have to get your lender’s permission before transferring the property – or risk having your loan called.

While your accountant may have suggested you use a corporation to hold your properties even an "S" Corporation, you should find out what he or she considers the benefits of holding title in the name of a corporation to be superior over using an LLC. An S corporation is a corporation in which the owners of the company have elected to be taxed at the individual level as opposed to the corporation paying taxes. You could say that an S corporation is somewhat invisible for federal income tax purposes, but an S corporation have other limitations.

You may find that holding the property in a corporation will limit your future ability to manage those properties from an income tax perspective or even for estate planning purposes. While most real estate investment advisors will tell you to own real estate investments in an LLC, your accountant may have a certain plan in mind that will work for you but not other real estate investors.

Talk to your accountant further on this issue and, perhaps, consult another one before you make the change.

Read more on limited liability companies -- LLCs -- and whether they are better for real estate investing.

Forming LLC For Investment Properties
Quit Claim Deeds For LLC
Transferring Rental Property To LLC
Creating an LLC for A Rental Property
Understanding LLCs For Rental Properties

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Related Topics

• LLC, 
• real estate advice, 
• real estate investment

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