There are three types of entities that are commonly used to own real estate. These are Limited Liability Companies (LLC), S Corporations (S-Corp) and Trusts. Let’s review what these three entities are, as well as, which one would be best for your real estate investments.
Limited Liability Company (LLC)
Limited Liability Companies are better for the long-term investors. Those are the investors who are known for buying and holding their investments. When someone buys and holds real estate the real estate is then known as a capital asset. The end goal for most long-term investors is to make money off of rent, or an expectation that the value of the real estate will increase over time.
S Corporation (S-Corp)
S-Corps are best for short term investors. These investors are often called flippers. This is because they buy real estate, then they keep it for a short time. After that, they sell the real estate to make a profit. Someone who flips real estate is usually classified as a dealer for tax purposes. The real estate that a dealer owns is known as inventory. Real estate dealers cannot take advantage of certain tax benefits including, capital gain tax rate and depreciation deductions. Short term real estate investors should form an S corporation. This may help the real estate dealer to skip the self-employment and social security tax on a bit of their profit earned from their short-term investments.
Where an irrevocable trust owns real estate, it is often beneficial to keep the trust going rather than to liquidate. For example, mom and dad put real estate into a trust when they were planning their estate. They are now deceased and the trust still owns the real estate. Rather than distribute the real estate and, if permitted by the trust document, the beneficiaries may want the trustee to continue to manage it. The management responsibility of a trustee is very close to what it is when one is managing their own affairs.
The type of form that you use while investing in real estate can vary for every situation. It is important to research before deciding which form you are going to use for a particular investment. The best thing you can do is seek a qualified lawyer who has tax knowledge to assist you in making successful investments.
JensenBayles, LLP provides a broad spectrum of legal services in wills & trusts, construction, business litigation, real estate, probate, elder law, tax and guardianship with over 100 years of combined experience. Please visit our web site www.jensenbayles.com or call 435-674-9718 with questions. The information in this article is for educational purposes only and is not intended to be construed as legal advice. Please contact an attorney for legal advice specific to your situation.