Choosing The Appropriate Legal Entity To Own Your Investment Property

Posted on: May 20, 2011

Categories: Buy, Other Articles, Things To Consider

Author: lbuen

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Legal Entity To Hold Real Estate Image by lhl via Flickr

Real estate investing is not all bed of roses. The challenges of running a real estate business is not limited to just the actual finding of a good investment property and conveniently collecting monthly rental income or handsomely earning a good profit by creatively selling it. Investing in real estate also entails cost and risk management. The form of legal entity that supports your investment properties plays a vital role in minimizing these costs and risks. Investors and tax and legal experts differ in their standpoint when it comes to deciding on whether a Corporation, LLC, Trust, or other types can best own investment properties. This divergence will continue simply because no one particular form can be considered the best for every investor. Your choice of a type of legal entity hinges on many factors including your personal circumstances and your strategy and affairs as a real estate investor. Let us look at particular factors that can influence your choice.

6 Important Factors To Consider When Deciding On A Legal Entity To Carry Your Investment Property

Type of Property To Acquire: Single family homes, multi-unit apartment buildings, commercial, office space, and so on.

Holding Period of Real Estate: Wholesale, buy-fix-and-flip, rent out and hold, etc.

Form of Income To Be Received: Rents, Profits From Sale, Commissions, and so on.

Estimated Monthly and Yearly Income For The Succeeding Years.

Exit Strategy For The Property: Sale, seller financing, lease option, pass on to next generation, and so on.

Other Investments and Forms of Income Vis-a-Vis Your Tax Situation: Non-real estate income, Salary, Stocks, Bonds, CD’s, Etc.

Your particular details of the above-mentioned factors can help determine whether to take on a Corporation, LLC or Trust. Many experts recommend an LLC for real estate. Although it can be a great choice, there are cases where taking this form can incur greater taxes as compared to a Trust or a Corporation. When deciding on the right structure of your entity, keep in mind five key results that it must be able to achieve for you.

5 Crucial Results Your Legal Entity Must Be Able To Attain:

Keep down taxes to allow greater overall ROI. The IRS and State agencies extend certain tax benefits for specific types of legal entities.

Allows your (property owner’s) privacy.

Curtails the intricacy and cost of holding the legal entity.

Gives maximum asset protection versus possible legal actions and creditors.

Provides sufficient leeway and a broad range of alternatives in managing and controlling the property.

Having studied your situation and known what results to obtain from the right legal entity, you are now in a better position to select the entity structure suited for you. Consider the following guide in making your choice.

Guide In Choosing The Right Legal Entity For Your Real Estate

1. Consult a competent real estate and asset protection lawyer to legally advise and assist you in establishing the most appropriate form of entity for your investment property(s). Discuss with him your analysis of your situation and what you want to get out of the entity.

2. At the same time, also discuss your analysis with a capable tax advisor who can aid you in formulating a game plan in deciding on the most fitting entity type for your investment property, this time from a tax standpoint.

3. Based on the advice of both attorney and tax advisor, establish the entity structure you have chosen to be most sensible for your property investments. Enlist them in your team so that they can work hand in hand in devising the most appropriate strategy and entity type for you.

Many real estate investors go the extra mile in research, analysis, due diligence, and many other measures to ensure ROI and success in the business. Pouring over your situation to determine the type of legal entity to support your property investments is one of these measures to construct your real estate business on a solid foundation.  New investors are sometimes so eager to dive in and start making money, they overlook this crucial aspect of running a real estate investment business.  Yes, it does cost more upfront, but if you don’t have the money to form the proper legal entity for your business you shouldn’t be investing in real estate anyway.  Bottom line, do NOT invest in real estate without understanding your liability exposure and tax consequences first.  As mentioned above, this is different for home flippers versus those holding properties for long term cash flow.

 Choosing The Appropriate Legal Entity To Own Your Investment Property
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