Are there downsides to holding Real Estate in an LLC?
This is not an area with which I have any experience or exposure, but I really thought I remembered, from CPE classes of days long past, and sources which I can no longer recall, or locate, that the recurring advice was, "Don't put Real Estate into an LLC!".
But now I find myself in a situation where someone is asking my advice on the subject and, the little voice in the back of my head keeps saying, "Don't put Real Estate into an LLC!", but I don't know why not, and every resource that's come up when I've attempted to research the topic, seems to scream, "DO IT!!!"
So, I'm looking for a little wisdom of the collective. Is there a downside to holding Real Estate in an LLC?
Or even better, Short of telling me it's because I'm losing my mind, Does anyone have any thoughts about what it is that's trapped back there in my grey matter, possibly slightly scrambled, that's making me think I remember, "Don't put Real Estate into an LLC!"? Am I confusing LLCs with something else? Or is it possible that that used to be the rule, based on circumstances at the time, and now things are different, and LLCs are a good vehicle?
I think it depends on the type of LLC it is. Disregarded vs partnership vs C vs SubS. Disregarded should be no difference except for the requirements when selling and making sure you keep the LLC active in the state. The partnership and corporate structures are of course different and their own tax filings.
Only thing I really watch for is the type of LLC. Have had several thinking it was a disregarded and in reality it was a partnership. Then they are surprised when they have to pay for a partnership return.
You *don't* put appreciating assets into a Corp (especially a "C") because removing the asset is a taxable transaction, unlike with a LLC and/or partnership.
Plus, with a C - there's the double taxation issue.
LLC's are generally the advised vehicle for real estate investments because of the limited liability component. But, as Bill points out, if the LLC isn't handled/treated/managed as a separate entity that liability protection can easily be pierced.
Thanks for the input, it certainly seems to be the prevailing thought. I don't know why I was convinced otherwise. And that issue of not co-mingling funds, etc., is something I've always had to mention to these particular clients, because they, and family, have multiple operations ongoing, simultaneously, and the different accounts and records are practically incestuous, there's so much cross-over. But now that they've created an LLC for one of the entities, and have been advised by their attorney to create a 2nd LLC for the real estate, I was sharing with them, advice I've seen, suggesting that the co-mingling of funds can be used as evidence that you and your LLC are not, in fact, separate entities, thereby shattering the liability shield, rendering your LLC useless.
You mentioned the word "family" so naturally, one might consider a trust, a series LLC/LP or an FLP? Similarly, if you are trying for simplicity, you might consider Rev. Proc. 2002-22 for mere co-ownership....all depending on the circumstances, of course.
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Are there downsides to holding Real Estate in an LLC?
This is not an area with which I have any experience or exposure, but I really thought I remembered, from CPE classes of days long past, and sources which I can no longer recall, or locate, that the recurring advice was, "Don't put Real Estate into an LLC!".
But now I find myself in a situation where someone is asking my advice on the subject and, the little voice in the back of my head keeps saying, "Don't put Real Estate into an LLC!", but I don't know why not, and every resource that's come up when I've attempted to research the topic, seems to scream, "DO IT!!!"
So, I'm looking for a little wisdom of the collective. Is there a downside to holding Real Estate in an LLC?
Or even better, Short of telling me it's because I'm losing my mind, Does anyone have any thoughts about what it is that's trapped back there in my grey matter, possibly slightly scrambled, that's making me think I remember, "Don't put Real Estate into an LLC!"? Am I confusing LLCs with something else? Or is it possible that that used to be the rule, based on circumstances at the time, and now things are different, and LLCs are a good vehicle?
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I have the same thing in my head, I always see people say to never put real estate in an LLC.
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Thanks for keeping me company in my wrongness! Maybe one day we'll either figure out where we heard/saw it, or why we're convinced we did!!! ;-)
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Why do you want to report this?
I think it depends on the type of LLC it is. Disregarded vs partnership vs C vs SubS. Disregarded should be no difference except for the requirements when selling and making sure you keep the LLC active in the state. The partnership and corporate structures are of course different and their own tax filings.
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lots of different flavors of LLC's probably why my brain had it scrambled up!
Why do you want to report this?
Only thing I really watch for is the type of LLC. Have had several thinking it was a disregarded and in reality it was a partnership. Then they are surprised when they have to pay for a partnership return.
- Asked by artyler1
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ProSeries Professional, United States
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You *don't* put appreciating assets into a Corp (especially a "C") because removing the asset is a taxable transaction, unlike with a LLC and/or partnership.
Plus, with a C - there's the double taxation issue.
LLC's are generally the advised vehicle for real estate investments because of the limited liability component. But, as Bill points out, if the LLC isn't handled/treated/managed as a separate entity that liability protection can easily be pierced.
Why do you want to report this?
Thanks for the input, it certainly seems to be the prevailing thought. I don't know why I was convinced otherwise.
And that issue of not co-mingling funds, etc., is something I've always had to mention to these particular clients, because they, and family, have multiple operations ongoing, simultaneously, and the different accounts and records are practically incestuous, there's so much cross-over. But now that they've created an LLC for one of the entities, and have been advised by their attorney to create a 2nd LLC for the real estate, I was sharing with them, advice I've seen, suggesting that the co-mingling of funds can be used as evidence that you and your LLC are not, in fact, separate entities, thereby shattering the liability shield, rendering your LLC useless.
Why do you want to report this?
You mentioned the word "family" so naturally, one might consider a trust, a series LLC/LP or an FLP? Similarly, if you are trying for simplicity, you might consider Rev. Proc. 2002-22 for mere co-ownership....all depending on the circumstances, of course.
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