Buying an investment property can be a great way to generate passive income and build long-term wealth. However, it also comes with risks and liabilities. Many real estate investors choose to purchase investment properties under a limited liability company (LLC) to protect their personal assets. In this article, we will explore the benefits and considerations of buying an investment property under an LLC.
An LLC provides liability protection for investment properties
The top reason to buy an investment property under an LLC is liability protection. If you personally own an investment property and are sued by a tenant or contractor, your personal assets are at risk. However, if the property is owned by an LLC, only the assets owned by the LLC itself are at risk. Your personal bank accounts, investment accounts, and other properties are shielded. This protects your wealth if tenants decide to sue you or if an accident occurs on the premises.
LLCs allow flexibility in ownership structures
LLCs provide flexibility in ownership structures for investment properties. You can add or remove members over time. You can also divide up ownership unevenly among members. For example, you could own 80% of the LLC that owns the property while your business partner owns a 20% share. LLCs allow you to share ownership while limiting personal liability.
Buying investment property under an LLC has tax implications
There are some tax considerations when buying investment real estate under an LLC. Most LLCs are taxed as partnerships if there is more than one member, or disregarded entities if there is only one member. Partnership LLCs do not pay taxes directly. Instead, profits and losses pass through to members to report on their personal tax returns. Disregarded entity LLCs are treated as sole proprietorships for tax purposes.
LLCs require separate accounting and paperwork
Owning investment properties through LLCs requires extra accounting and paperwork. You need to keep the finances of the LLC completely separate from your personal finances. This means having a separate bank account and keeping detailed records. You also need to file a separate tax return for the LLC each year. Some administrative costs come with maintaining a LLC.
Financing may be more difficult under an LLC
Some lenders restrict loans to LLC entities, so financing investment properties within an LLC can be more difficult than personal ownership. Lenders may require personal guarantees or a higher down payment. However, once you have a track record of success with an LLC, financing generally gets easier over time.
Buying real estate investments under a limited liability company has many benefits but also some downsides to consider. Overall, the liability protection provided by LLCs makes them a popular choice for holding investment properties.