For most real estate investors, or those considering investing in real estate, the question inevitably rises: should I hold the property myself or hold it in a real estate holding company? The answer to this is dependent on your situation, although the majority of real estate investors err on the side of caution and operate using real estate holding companies.
Why Use a Real Estate Holding Company?
Ultimately, the greatest benefit of a real estate holding company is limited liability. By holding the real estate in a liability limiting legal entity, such as a limited liability company (“LLC”), the investor is able to separate their personal assets from those of the legal entity. In doing so, your personal assets are protected from creditors and anyone else pursuing you for liability relating to the real estate investment. The separation of liability between the legal entity and the investors is known as the “corporate veil”. If you want to protect your personal wealth, then a real estate holding company may be for you.
What Legal Entities can be Used?
A real estate holding company can be nearly any legal entity, such as an LLC, or a limited liability partnership (“LLP”) or corporation if you have multiple investors. Generally, these entities will provide a “corporate veil” to protect investors. However, each legal entity has various advantages and disadvantages – consult with an experienced real estate and business attorney on which entity best suits your goals and situation.
When choosing a legal entity, differences in tax treatment are often the driving factor to favor one over another. Corporations are taxed at the corporate level which subjects their income to “double taxation”. This means that the corporation will pay federal and relevant state corporate tax on profits. Then, the after-tax profits can be distributed to the shareholders as dividends or retained within the corporation. When distributed to the shareholders, the shareholder must pay tax on the dividend as income – hence the “double taxation”.
In comparison to a corporation, LLCs and LLPs are subject to “pass-through taxation”. This means that these entities simply pass through all of the income, expenses, depreciation, etc., to the members or partners, as if these investors held the asset directly. For many investors, pass-through taxation is preferential and results in improved cash flow due to the lack of double taxation and other potential tax advantages caused by depreciation, etc. being passed through. However, this is not always the case as some investors may benefit from using a corporate entity despite the issue of double taxation. Always consult with an experienced real estate attorney on tax-related real estate issues.
Real Estate Lawyer in Rhode Island, Massachusetts and Connecticut
Palumbo Law has advised real estate investors across Rhode Island, Massachusetts and Connecticut in commercial and residential real estate investments and transactions. Whether acquiring your first property or divesting a portfolio, the attorneys at Palumbo Law ensure that you’re protected – maximizing your returns by protecting you and your investment. If you’re a real estate investor in Rhode Island, Massachusetts or Connecticut and are considering the use of a real estate holding company, please contact our office today to schedule a consultation to determine the best option given your situation.