Should Your Rental Property Be in an LLC?
Post by: Lesley Hempfling
The real estate downturn that hit the rest of the country has seemingly had little (if any) effect on the market in Austin, Texas. People here seem to be not only buying new houses or remodeling their current homes, but they are also investing in real estate as a way to supplement their income or plan for retirement. I get several calls a week from people who want to know whether they should set up an entity to hold their "non-Homestead" real estate (usually rental properties) or whether they should manage the property along with the rest of their personal assets.
While there are many ways you can structure your next real estate deal, by far the most popular in Texas seems to be the Limited Liability Company. Below are a few of the reasons why an LLC may be a better vehicle for holding your real estate:
• Centralized management: simplifies agreements with third parties (e.g. lease arrangements, construction contracts, maintenance contracts) where multiple owners are involved;
• Separate ownership interests from control interests: this may be important in the instance of "silent" owners or in the case of family owned property where all of the family will have an ownership interest, but not all will participate in the day-to-day decisions;
• Allows for the segregation of assets: segregating your personal assets from your business assets affords you and your family a level of creditor protection;
• Limited liability: provides owners with limited liability for acts or omissions of the entity and can also provide for personal indemnification if agreed to in the Company Agreement;
• Income tax flexibility: single member LLCs will automatically be treated as "pass through" entities (taxed at the member level), or you may "check the box" and choose to be treated as a corporation for income tax purposes; multiple member LLCs will automatically be treated as a partnership for income tax purposes (taxed at the member level), unless you "check the box" and choose corporate tax treatment;
• Transfers may receive a "discounted" valuation: discounts may be available for transfers (at death and during life) of interests in family owned LLCs;
• Allows for transfer restrictions: your Company Agreement and/or Buy-Sell can be drafted to restrict the transfer of the LLC membership interests;
• Flexibility to expand: your Company Agreement can be drafted to allow for new members and additional expansion of the current business model through appropriate amendments;
• Ease of transferability at death: the transfer of your interest in an LLC at death will not disrupt the regular course of business of the LLC. Unlike transferring your interest in a piece of real estate that you own individually, a new deed will not need to be drafted or filed; rather, your beneficiaries are simply inheriting your "interest" in the LLC. The Company Agreement will determine the scope of that interest.
Disclaimer: This Article is limited in scope and does not discuss other available alternatives or potential negative consequences to the use of an LLC in a real estate transaction.