Tax Benefits of a LLC
What are the tax benefits of having my company own the property instead of me owning it? How can a LLC save me money on taxes?
Great question. I see lots of PM companies mentioning tax credits they get for offering LOW INCOME HOUSING.
It would be interesting to see that just the fact than an LLC holds title not a person is in itself a tax incentive though.
Heck here in CA i think it costs $800/yr per LLC even if its not active.
From a pure tax compliance perspective, there is no tax benefit of an LLC. You can deduct the same expenses for your rental if the property is owned in your name. The benefits come elsewhere - asset protection, limited liability, tax planning opportunities increase, etc.
And LLCs add some distance identity-wise, all the way up to complete anonymity in some US states.
Originally posted by @Lance Lvovsky:
From a pure tax compliance perspective, there is no tax benefit of an LLC. You can deduct the same expenses for your rental if the property is owned in your name. The benefits come elsewhere - asset protection, limited liability, tax planning opportunities increase, etc.
How does it help with tax planning?
More opportunities to implement tax strategies, bring on outside investors by selling membership interests, more flexibile in raising capital, etc.
LLC's are commonly used in family/estate planning as high net worth individuals can gift LLC interests to their kids thereby removing/reducing estate tax while still retaining control of the assets.
@Lance Lvovsky how does the LLC reduce estate tax? The valuation of the interest gifted is based on the assets of the LLC. If you have $10 million in property in an LLC and gift half of the LLC to your kid then you've used your gift/estate exclusion. No different than just gifting the property itself. Am I missing something?
Yes. With valuation discounts such as lack of of marketability and lack of control. Reduced gift tax while getting any future appreciation out of the estate. Someone worth $10 million is more concerned about "freezing the estate" and getting future appreciation out of the estate.
@Toby Kahan - 50% of an LLC that holds $10m worth of real estate does not have a fair market value of $5m. Depending on how the LLC operating agreement was drafted, and other factors is could be 25-40% less based on the discounts that Lance described. Also, using an LLC can preserve control. For example, mom and dad can have 1% voting membership interests, and give away 49.5% nonvoting membership interests to son and daughter (total gift of 99%). Mom and dad have used their gift tax exemption efficiently (maybe used $7m to remove ~$10m of value from their estate) and mom and dad still have 100% of the voting (i.e., controlling) interest so they can manage the property and control distributions as they like.
This is a great topic and it seems a lot of people (including myself) still confuse about the pros/cons of opening an LLC. I remember listening to BP podcast (somewhere around shows 60) where Brandon asked the guest if he shelters each of his property under a separated LLC, and the guest answered that he put 2-3 properties under 1 LLC. I'm totally lost!
Can someone point me to a good source and/or book that can teach newbies like me about pros/cons of opening LLC(s), especially for real estate?
Is this topic getting lost? Can some experts jump in and help? Thanks
@Chris Penny - Not sure if you are looking for more, but the truth is that as an LLC is typically taxed as a disregarded entity or partnership depending on the number of members. This means that the owners pay tax as though they earned the income directly themselves. There is not an obvious income tax benefit. You will pay the same taxes. There may be some secondary issues, such as fewer audits on LLCs than on schedule C or M of a 1040, but that is probably not what you are looking for.
Does that resolve the issue for you?
If you are using LLCs to minimize federal wealth transfer taxes you are best meeting with an attorney. There may not be an estate tax in the future. It not clear with Trump as president.
Anyway a SMLLC does not change anything for tax purposes. The property still goes on schedule E or C of Form 1040 depending on whether it's a flip or a rental.
For income tax purposes it usually doesn't matter. If you have more than one member in the LLC you are usually better off with a partnership but it depends.
@Chris Penny, The reason why people create LLCs is for asset protection, but there is a cost to having an LLC because you have to pay annual registration fees and, for multiple-member LLCs, you have to file a partnership return, increasing your cost. For this reason, many investors will put more than 1 property into one LLC, to have protection but reduce their expenses. Having an LLC for each property would be too costly and time consuming.
If you own one property and you are the sole owner, then for tax purposes it won't matter whether you have it under an LLC or your own name. It will be reported on Schedule E in both cases, resulting in the same tax liability.
-Ana
Thank you @Ana Garcia , @Javi Chipi , @Josh Prince!