One of the most common questions we get asked when we teach is “What type of legal entity should I hold my real estate in?” Unfortunately, the correct answer to this question is most likely “IT DEPENDS”. For real estate investors, the best legal entity to hold title to your investment properties should accomplish the following 5 objectives:
- Minimize taxes due to the IRS and State agencies and in turn result in a higher overall return on investments
- Allow for maximum asset protection against potential lawsuits and creditors
- Provide privacy to the owner(s) of the property
- Allow the investors to achieve a wide range of flexibility and options regarding the management and control of the property, and
- Minimize the complexity and cost of maintaining the legal entity(s).
LLC v.s. Trust
You may have heard people tell you “Always use LLCs for real estate”, and another person may say “Always hold your real estate in a Trust”. As a real estate investor, it can be both confusing and frustrating to receive such definitive, yet contradictory advice. As a result, a lot of investors are left to wonder – just which one is correct??
To make things even more complicated, each state has its own taxing authority with different rules on how income is taxed.
An Example of Why Choosing a Legal Entity is Tough
For example, if you own investment properties in Tennessee and you have a Tennessee LLC, then you have to make sure that your entity is set-up correctly in order to minimize your tax bill. Tennessee is one of those states where LLCs are subject to both franchise and excise taxes. The franchise tax is calculated as .25 cents per $100 of the net value of all of your investment property held within the LLC, up to a maximum of $100.
The Franchise tax is due each …read more