Using LLCs
Legal Benefits for Property Ownership
Leverage the advantages of LLCs for property ownership with legal guidance to protect your assets.
Using LLCs for Real Estate Transactions
Forming a Limited Liability Company (LLC) for real estate transactions can protect owners from personal liability, simplify management, and offer other economic benefits. The relative affordability of forming LLCs also makes them popular for separating property assets and their related risks. LLCs also provide flexibility in ownership and can make it easier to transfer property interests. This article discusses some common ways real estate investors use LLCs in their businesses.
How Does Segregating Assets Offer Liability Protection
Liability falls on the party responsible. If someone breaks a contract, they pay for damages. If someone gets hurt, they sue the property owner. Keeping investment assets in separate legal entities protects them from each other’s risks. A claim against one entity affects only its assets, not others. (However, a parent company can still access a subsidiary’s assets to cover its debts).
Why Use an LLC for Asset Segregation?
In general, LLCs are favored as compared to other legal entities for a few reasons including their flexibility, relative ease of use, and relatively low overhead costs. In years past, LLCs would also be used to keep personal ownership information private. However, the Corporate Transparency Act will likely make this privacy feature less relevant. However, when taken into combination, the three advantages of LLCs are particularly meaningful for real estate structuring: The flexibility, operational simplicity, and low costs make it much more viable to establish new entities for individual properties, which means their liabilities can be separated. Transferring membership interests in the LLC rather than title interests in the real estate asset it holds can also offer additional transaction flexibility for joint ventures and estate planning.
How Do LLC Transactions Differ From
Real Estate Transactions?
The due diligence aspects of the transaction, along with its fundamentals, are very similar except for some additional due diligence confirming the LLC ability to act and its other liabilities. From there, though, things start to look very different. Rather than a transfer of real property occurring, there is a transfer of personal property, which is a membership interest in the LLC. There may be different classes of membership interest with different rights and duties. No public recording is required, the titled owner of the real property remains the same. However, transferring a controlling interest is still considered a taxable event. And note, most financing will require lender consent before a change in control.
Can an LLC Still Participate in a 1031 Exchange?
Yes, an LLC may participate in a 1031 exchange. However, it is important to distinguish the LLC’s participation from that of its members. A fundamental characteristic of a 1031 exchange is that it is the sale of interest in real estate for the purchase of interest in real estate. So, if an LLC that owns real estate has an interest in real estate. But the members of the LLC do not, they have a personal property interest in the LLC instead. Similarly, fractional transfer by some members and not all becomes much more complex. As a simple rule of thumb, the names on title for the purchase must match the names on title for sale.
Use LLCs for Your Real Estate
Are you interested in learning more about how Limited Liability Companies (LLCs) can be used to protect your real estate holdings? Book a consultation with Cascade Counsel today to discuss LLC and other structuring options for your real estate today.
