Owning Resi Rentals as a corporation
I've always kept rental property in my own name to maximize the deductions. I keep hearing about people who own rental property in the name of a corporation for the benefit of limited liability. I use an umbrella policy to limit my liability. I wonder what others are doing. The double taxation part doesn't sound great either. Any pros and cons for owning property as a corporation? It seems to me that tax wise, you'd have to get into a very high bracket to make it worthwhile...
landpimp2000,
A corporation, LLC, and LP all provide some measure of liability protection. Though from your question I think you are confusing liability insurance with liability exposure. When you own all your rental property in your own name, all your business and all your personal assets are exposed to a lawsuit. In this instance, your liability exposure is everything you own.
An umbrella policy only establishes a limit on the amount your insurance company will pay if you lose a lawsuit. The policy does not limit the amount of the judgement that the court may award. Let's say that the judgement is for $10 million, but your insurance policy has a $1 million limit. Your insurance company will pay the million, while you will have to surrender all your business and personal assets to cover the $9 million balance of the judgement. If everything you own can't cover the judgement, you may also have to surrender a large portion of your future earnings for as long as it takes to satisfy the judgement.
A business entity helps limit your "liability" to the extent of only the assets owned by the entity. Your personal assets are shielded from exposure in a lawsuit arising out of your business activities. Therefore in this context we say that the business entity provides asset protection.
A C-Corporation may be appropriate for high-income individuals who pay for their own benefits. If neither you nor your spouse has a day job that provides benefits, some perks and benefits become tax-free when expensed through the corporation. On the flip side, C-Corporations are fairly expensive to administer, so, the benefits must outweigh the costs (e.g., extra tax returns, bank accounts, etc.). Additionally, corporations have various restrictions on who can be an investor, and what kind of income can be earned.
Rental properties sell at favorable capital gains tax rates, generate depreciation deductions, allow your capital gains tax to be paid over time when an installment sale is used, and, can be exchanged for other real property tax-free.
A Limited Partnership (LP) and a Limited Liability Company (LLC) both preserve these tax advantages of investment rental property. In most states, an LLC is cheaper and simpler to set up and run, so it is normally preferable to an LP. Also, in an LLC no personal liability attaches to the members; whereas, in a LP, personal liability does attach to the general partner.
[ Edited by DaveT on Date 01/27/2003 ]
Dave T hit the bulls eye. Listen to him. Asset protection is never attended to enough until it is too late.
BTW: really bomb proof yourself with a corperate General Partner for you LPs and FLPs. One might also consider using land trusts with LLCs as the beneficiaries. You might say: do business in corporations and own assets, including the corprate stock, each in seperate FLPs and LLCs. Don't let one problem domino into other assets.
If one folds the whole shooting match into a comprehensive estate plan, revocable living trusts, irrevovable trusts, wills, family limited partnerships and LLCs, one might sleep a heck of a lot better.
Pimp Daddy -
Get those properties outa your name!!!
I have a buddy that owns mutli familys that had a tenent sue him for a piece of plaster falling from the ceiling....here comes the best part, IT HIT ALL 5 FAMILY MEMBERS AT THE SAME TIME!!!
Wait it get's better, the plaster piece was suposed to be as big as a dinner plate.
It get's better, they (tenents) won the judgement and he is no longer doing real estate.
Now that's what I call a GROUP HUG! Don't be this guy, get the properties out of your name.
Good Luck
gtrzndrums
Sorry, correction...OWNED!
gtrzndrums
thanks for the info folks. I'm convinced. I'm going to move everything to an LLC and buy a beer or 12 with my decreased premium on my umbrella policy....that is if there's a balance after the attorney fees.
You can do them much cheaper than with an attorney. Example, my parents formed an LLC and paid an attorney 800 bucks to do the paperwork. A friend of mine in RE had his done for 250. You can do it online yourself for even less depending on the state.
Make sure you are getting what you want out of your LLC, all LLC's are not the same. Your articles and operating agreement are very important on how you set up your company. I don't know how the internet helps you through these decisions, but maybe it does. Tax filing information is also set up in the LLC.
LLC's are very moldable, they can function as S corp's, C corps, it's all in how you set it up. So, set it up right the first time. You would be upset if you are a small company and you find out that your company losses are not able to flow through to your personal return. I hope you see that, yes they are simple and painless to set up, but get advise either way you go from a pro. Start up cost and pro services are all deductable.
My real estate attorney charged me $600 to set up my LLC. Big deal, that's 1 months rent from one of my rentals that paid for the documents that show the principals on how my company operates. These documents are important. I want to sleep well if I ever get audited and so do you.
"I was not the smartest person in my school. But, I do hire people who were the smartest in school. This is how I build my businees team, by surrounding myself with the smart people" Robert Kiyosaki
Hope this helps -
gtrzndrums
Don't fool yourselves...in this day of suit happy lawyers, they'll sue the LLC, the principals, the grandmother and the pet.
BillyD,
I look for the good in everything, so I will try to find the good in your comment. And the good is that you are right that lawyers sue everyone, piggybacking they call it.
The sky is also blue.
But, I still think you missed it, bigtime. We are trying to help our friend here on the subject of ASSET PROTECTION. This is the idea of creating a firewall so lawyers can't take your belongings at home.
So, the LLC is a great tool for this protection
I'm not sure who's fooling who, but some good books on the bizz could help you out in a big way BillyD.
gtrzndrums