Should I Set Up An Entity To Purchase Rental Properties?

Question

I am just starting out in the investment property world. I am pretty sure I should set up a Corporation, LLP, or LLC for tax and liability purposes. Would some of you real estate gurus please advise? Thank you.

Answer 1

To the website: http://www.creonline.com

They have a free forum full of the sharpest people around who can give the best advice about this or any other matter.

Answer 2

If you set up a full C corp., you'll be paying taxes twice. First, the company pays, and then you pay your personal taxes when you take the money out.

An LLP, Limited Liability Partnership, has liability benefits that I learned about some time ago, but much too extensive to discuss here. Have to have to state who the general partner is at the time of organization, and he/she is personally responsible for all debts.

One lawyer suggested that I set one up, with a LLC or C corp. as the general partner owning 1%. This was supposed to stop all lawsuits, as the creditor doesn't get an actual judgment against the LLP. Instead, the creditor would get moneys that are dispersed to the partners. But, if no moneys were dispersed, the creditor would still have to pay income tax on the money earned and not received. For this reason, I was informed that no one sues an LLP.

Finally, the LLC is a limited company. There are both taxing and liability benefits, but you are limited to a 30-year life of the company. You can pass assets through as personal earnings.

An alternate choice would be a Real Estate Land Trust. This offers the anonymity of ownership. You would set your self up as the grantor, beneficiary and the trustee. Not sure about the tax benefits with this one as I haven't discussed it with my accountant.

Finally, if you are just starting, don't waste your time and money on an organizing an entity. Unless where you live is extremely litigious, it isn't worth it starting up.

I do business as Better Properties, a sole proprietorship. My accountant says that is the best way to approach the tax issue from a cost benefit basis. My lawyer is warning me that I need to protect my assets but admits that a law suit is unlikely and the proprietorship works best right now for tax purposes.

Hope that helps.

Good Luck

Answer 3

Each type of legal entity has its own advantages and disadvantages.

The last real estate meeting that I attended that was discussing this, their final verdict was to go with a LLC. But to set-up a LLC for each property. That way, if something major happens it cannot destroy all of your holdings.

Say you have 5 LLCs. Lets say at LLC #3, due to high crime or the area's rental market - you are unable to obtain sufficient rental income to cover the bills. By having multiple LLCs, the creditors of LLC#3 cannot go after the assets you have in LLC #1, #2, #4, and #5. You can decided to try to save LLC#3 or let it sink.

Answer 4

There is no advantage to setting up a corporation for owning rental properties. It actually could hinder you. First, most banks will not want to make a mortgage loan to a new corporation. Second, unless you elect to be an S corp, any losses on the rental of the property would not be tax deductible to you and any profits would be taxed at the corporate level and also at the personal level in the form of dividends or salary to you from the corp. Any liability concerns you have can be covered by property insurance.

Answer 5

There are several advantages to setting up a corporation to protect yourself and your personal residence and other personal items from liability.

The other thing is you only need one, because the way it is set up now is the lender can only foreclose on the property they have the collateral on. Not only that it would be a nightmare to try and run 5-7 different LLC, keep the financing and bank accounts seperate. You would drive your accountant up the walls.

Most banks and some lenders will now lend to corporations without recourse. Of course the corporaton must be solvent and, can prove income and other requirements. If you are keeping your books correct and not raping your corpration you should be able to to all that. You must also have a good working relationship with your bank so walk on in there and meet your Vice president of your branch. He will want to meet one of his biggest dispositors.

Now don't go right out and start this LLC or other corporation with just one property. The way you can accumulate wealth and be real abou it as well as cash for future uses is a plan I use. You have to select one that you can live with.

I keep one out of every three properties I get for fix-up, therefore I have income from 2 fixers and wealth building by keeping one. With this method you will have 24 house at the end of your first full year.

After the third property you might, at that point decide to form your corporation that you have selected to use.

Have a chat with your tax advisor about setting this up and which is the best method of you getting paid and other items you might need to discuss prior to setting up your corporation. There are some advantages to having your family as part of the corporation, such as health insurance for all corporate members. You will need a secretary/treasurer= wife, high price gofer-kids plus they are on the payroll( allowance) tax deductable ouch did I say that? So check with your tax guy before settiing this corp up to decided which is better.

If you are just starting out please get a working idea of what you are doing. Go to the book store and start you a library of books you will need to be successful. Check out any book on the purchase of foreclosures, buying, fixing and flipping. Some might be available at yuor local library.

Next purchase one of the local guru's TV program that they sell. This will give you some legal forms that you need to make offers on property. Various states have differing laws about buying foreclosures.

In California for instance after makaing an offer you can not speak to the person in foreclosure for 3 days after the contract has been offered and the letters must be 10 pt minimum.

So become knowledgable about your state laws, you mitght be able to find a lot on the internet

You also would want to join the Apartment House Association in your local city.They will assist you with legal forms when renting your properties. They will also have the current laws governing your local area. They can also set up and perhaps assist you in getting credit reports for your potential renters.

I hope this has been of some use to you, good luck

"FIGHT ON"

Answer 6

set up a loss acquiring company, that way any initial loss can be counted against future profits reducing your tax liability in those future periods. This will also limit your liability with only the company's assets being in danger if anything goes wrong.

Answer 7

No have Rental