If you are considering an LLC, it is important to understand the limitation
of personal liability involved when lawsuits arise relating to your property.
In the state of Florida, homestead protection laws are offered for the
resident’s primary place of residence. There are many benefits to
this protection, including that the owner will receive tax credits and
they will be exempt from a forced sale.
One of the hang ups with this structure is that not all Florida real estate
buyers are classified as Florida residents. A large amount of the individuals
we represent during their real estate transactions are actually foreign
nationals. Therefore, they are not allowed to enjoy these homestead perks.
If this is your situation, the LLC structure may be the next best option for you.
In the situation where a person gets a judgment against you individually,
the party would typically consider what assets you own that are collectible.
With the LLC structure, you would be protected as an individual from having
your property exposed in such a way, as long as the corporate formality
is held to. Additionally, if a judgment was obtained against the LLC,
the individual would be protected against collections and the creditor
would be limited to collect assets that are owned by the LLC.
Pass-Through Taxation for Single & Multimember LLCs
One of the greatest, but least understood, advantages of an LLC is that
they can elect the manner in which they are taxed. You have the opportunity
to decide whether you should file as a “disregarded entity”
or to receive corporate treatment. Both approaches offer substantial advantages
depending on how much income you want to take personally and how much
you want to reinvest in your company. Each person’s situation is
unique and we advise that you consult with a CPA or tax professional so
that you can understand what is the best option for you and your LLC.
Disregarded entities are treated in a similar was as a sole proprietor
and therefore, your LLC’s income will be dealt with in a similar
way as your personal income.
By choosing corporate taxation, your company will be taxed at the low corporate
rate for the first $75,000 of your income. This option can be chosen by
filing IRS form 8832.
The IRS will classify a real estate holding company with one owner in the
same way as they would a sole proprietorship. As a result of this classification,
income and capital gains from the LLC will pass directory to the owner.
The owner would only be required to pay taxes as an individual and would
still enjoy the protections of the LLC liability shield.
Avoiding Double Taxation
The owner will be able to avoid double taxation on their rental income
from the property and the appreciation in value of the property at disposition
because of the fact that there is no separate LLC tax. Additionally, with
the current IRS rules, the owner of a single-member LLC can deduct mortgage
interest in a similar way to a sole proprietor.
Multimember LLC’s, or those with several owners, are typically taxed
by the IRS like a partnership. This means that the LLC will file an “information”
tax return, but will not actually pay any taxes itself. This type of LLC
will also enjoy benefits of pass-through taxation as LLC distributes profits
and losses to its members. The members report their portion of the business’
income or losses on one of the following with their own tax returns:
- Schedule C
- Schedule K
- Form 1065
What this means is that both the single member and the multimember LLCs
offer benefits of the pass-through taxation of profits and losses, and
they receive protection for the owners and the LLC.
Minimizing Your Risks by Choosing the Right Plan
You can never completely eliminate the risks associated with jumping into
a real estate investment business. You can, however, improve your chance
of success by remaining in compliance with the corporate formalities that
are required by applicable laws. Even if these steps seem tedious or confusing,
it is still in your best interest to do so.
If you are in the market for an investment real estate, you should consider
whether an LLC is the best option for you. It may be easier to purchase
a property through the LLC from the start, rather than trying to transfer
real estate to an entity at a later date. If you wait, you will likely
have to pay additional expenses associated with the transaction.
If you need to set up your LLC,
contact Your Advocates for the help that you need! We serve clients throughout Fort Myers and
offer the professional and caring assistance needed. With
more than 50 years of combined experience, you can count on us for knowledgeable assistance.