Entities for Investing in Real Estate
Information for US Investors
Limited Liability Companies ( LLC’s )
When purchasing real estate, it is generally prudent for a buyer to form a limited liability company (“LLC”) to hold title to the property. A limited liability company is a business structure that combines the pass-through taxation of a partnership with the limited liability of a corporation. By holding title in an LLC, an owner can protect themselves from personal liability for the debts and obligations of the LLC.
When choosing the state in which to form the LLC, there are several issues to consider including taxes, where the property is located and fees.
Taxes – The LLC itself is not a separate taxable entity. Because the LLC is a pass-through entity, profits and losses pass-through to the individual members of the LLC and such members are taxed at their individual tax rates.
More specifically, profits and losses generally are allocated to each member of an LLC based upon their percentage interest.
Where the Property is Located – If the Property is located in Arizona, it is generally prudent to form the LLC in Arizona. If you form an LLC in another state (e.g., California), and you want to use that LLC to own investment real estate, you will still be required to file an application for Registration of a Foreign Limited Liability Company to transact business in Arizona.
Fees – While the filing fees for the Articles of Organization are comparable in both Arizona and California, the State of California imposes an annual minimum fee of $800. There are no additional annual fees for an LLC formed in Arizona.
In some instances, these additional fees alone make forming an LLC in California cost-prohibitive. As you can see, the cost of forming and maintaining an LLC in California is significantly greater than the cost in Arizona.
Asset Protection – When purchasing multiple properties, it is generally prudent for an owner to form a separate LLC to own each property. This will maximize an owner‘s asset protection. Separate ownership will isolate the equity in each property from potential claims brought against other properties.