There are several strategies for owning real estate investments. One of the questions that should arise when implementing your strategy is, how should you structure the ownership of your rental properties?
There are many choices and structures when it comes to holding real estate. You’ll want to consult with a competent attorney who specializes in these types of structures before you decide. However, some of the most common ways to hold your rentals are as an individual or as an entity, such as a limited liability company (LLC), partnership, S-corporation, or Trust. Depending on the size of your portfolio, entity structuring can be pretty simplistic or complex. Entities do offer further tax benefits and mitigate risk as an investor, but it’s not right for every investor.
Choosing the Right Structure for Your Goals
Your goals, the size of your current portfolio, and your risk tolerance are all factors to be considered when deciding between individual and entity ownership. Because no two real estate investors are the same, no one blanket solution will work. Consulting with a tax professional and a real estate attorney is vital to determining the best ownership structure for your situation. Here are some things to consider as you look at your different options.
Ease of Use
Owning property in your personal name does make things easier to handle. If your property is in your own name you can open a bank account or use your current bank account to deposit and access funds. If your property is owned by an entity like an LLC you will have to go through additional steps of providing the bank with additional documentation and opening an account in the name of the entity. However, with an entity you can benefit from additional levels of protection against creditors, as well as the ability to establish a board of directors for better decision-making.
You are personally liable for any losses that occur when you own real estate in your personal name. This means you can be held responsible if someone is injured on the property or a tenant damages it or other property. You may be responsible for the costs associated with repairing, replacing, or compensating the damaged property or person. Additionally, your personal assets can be at risk if you are sued for any reason related to your rental property.
On the flip side, owning property in an entity structure can provide you with additional liability protection. Certain entities provide you with a corporate shield, meaning that the entity is liable for any losses and not you personally. This protects you personally from any lawsuits related to the property, as well as any potential damages caused by tenants or other third parties. It also makes it more difficult for creditors to come after you personally, should they try to collect on any debt related to the property.
When it comes to asset protection, owning property in your personal name leaves your assets vulnerable to potential lawsuits or creditors. This could lead to the seizure of your assets if they were to win a judgment against you. On the other hand, a corporate entity offers greater asset protection since the assets are held within the entity structure and are not directly owned by you.
This provides a layer of protection between you personally and any potential claims against your personal assets. Additionally, an entity can limit the amount of money that can be taken in the event of a successful lawsuit. It simply provides an additional layer of protection between your assets and potential claims.
For tax purposes, the differences between owning property in your personal name versus an LLC can be significant.
If you own a property in your personal name, you will be responsible for filing taxes on any rental income. This includes federal income taxes, state income taxes, and self-employment taxes, depending on your particular situation.
However, entities are taxed differently. For example, any rental income generated through an LLC or an S-Corp is not taxed at the corporate level. Instead, you’ll likely have to file a Form 1065 for the partnership and then report any income on your individual tax return. With an entity, you may also need to pay estimated taxes quarterly on any profits generated.
Get Professional Help
Ultimately, it is important to weigh the pros and cons of the options when deciding whether to own property in your personal name or through a corporate entity structure. The tax and liability implications can be complicated, so it’s important to speak with a qualified accountant and attorney before making a decision. They can help you understand the potential consequences of each option and develop a plan and a structure that works for your specific needs.
For more about investing in Utah real estate get in touch with our team at Envy Property Management.