4 Essential Power Structures for Real Estate Investors

Whether you buy and hold, fix and flip, invest with your retirement account, or a combination thereof, real estate investors are exposed to more liability than those who invest elsewhere. There are inherent risks to property ownership that you won’t encounter investing in stocks. Additionally, real estate investors who don’t understand the Tax Code will be doomed to overpay year after year.

To address these myriad threats against wealth accumulation, use entities. Entity structuring involves using one or multiple entities to create an entity structure that shields your assets from personal and business creditors, as well as unnecessary taxes.

Long-term Real Estate Strategies

With long-term buy-and-hold real estate investments, the main concern is maximizing the owner’s privacy and asset protection. One of the important things to consider regarding asset protection is charging order protections.

Charging Order Protections

When it comes to protecting your buy-and-hold real estate investments, many will suggest “just put it in an LLC.” However, where your LLC is set-up and how your entities are structured are crucial. A charging order is basically a lien against interest. If you are sued personally and there’s a judgment against you, a charging order protects your LLC’s assets from that creditor. Instead of being able to seize your LLC’s assets, the creditor’s only option is a charging order, which entitles the creditor to any money distributed from your LLC and since you’ll be in charge of your LLC, you won’t distribute any money.

Long-term Real Estate Strategies

Considering this, you’ll want to use a Nevada or Wyoming holding LLC to own each of your in-state LLCs. Each property should be held in a separate LLC created in the same state as the property. Each property-holding LLC should then be owned by your Nevada or Wyoming holding LLC.

Short-term Real Estate Strategies

If you invest in fix-and-flip properties, one concern should be avoiding dealer status with the IRS. Whenever you hold an asset for less than one year before selling, this could be considered being a dealer. Moreover, the IRS test for this is intent based, meaning it doesn’t matter how many flips you do.

Topics: Real Estate Investment, Tax

Work cited: Michael Bowman, January 03, 2020

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