Boutique Real Estate Investor Planning
LG TITLE & ESCROW is trusted by investors of all sizes, from local investors, developers, wholesalers, rehabbers to national institutional investors. We provide closing, escrow and settlement services, title searches, lien mitigation services, and title insurance to provide our investor clients with the clarity and confidence they need to move forward with their investment.
We understand that thorough due diligence and a comprehensive understanding of title, ownership, tax, and legal issues are foundational to the success of any real estate investment. That is why the attorney-owned and operated team at LG TITLE & ESCROW leverages its substantial resources, seventy combined years of title expertise, and a team of title and legal professionals committed to our clients’ success to quickly and efficiently identify potential problems that could threaten a closing transaction.
From our combined decades of experience handling complex investor deals - to working flawlessly online to simplify and speed up the closing experience. For an even more in-depth understanding of the type of investor protections our attorneys can provide you please click on the following link below from our parent company, Loevin Law Group, PA.
We are experienced in assignments, double closings, and quick closings in as little as 24 hours. The right title company can get more deals successfully closed in a stress-free environment.
Business Structures and Real Estate Investments
There are various ways investors might structure their property investments to minimize their personal liability and gain tax flexibility. Let’s take a look at the four most common below, which are LLC, Limited Partnership, Corporation, and Land Trust.
1. Limited Liability Company (LLC)
Here’s a brief overview of some of the advantages of the Limited Liability Company (LLC) entity type:
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An LLC is a separate legal entity from its owners, so it limits personal liability.
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By default, an LLC is a pass-through entity. However, if it meets the IRS criteria, an LLC may elect S Corporation tax treatment.
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Forming an LLC is relatively cost-effective and simple. It requires submitting Articles of Organization with the state.
There are several ways to structure real estate using the Limited Liability Company for real estate investments. Let’s explore these options one by one.
A Sole LLC for All Properties
With all real estate investments under one entity, this approach offers the perk of simplicity.
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Only one Articles of Organization needs to be filed.
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There’s no business tax return, and each LLC member has just one business that passes its income and losses taxes through to their personal tax return. Also, the owners need only maintain compliance for one entity.
A potential drawback to having all properties under a single LLC is that if a lawsuit targets one property, assets at all of the LLC’s properties will be at risk.
Separate LLCs for Each Property
In this approach, each property is under its own LLC. Because they are individual legal entities, properties are protected from the other real estate investments’ liabilities. There are more formation requirements and costs to handle things this way.
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Owners must file Articles of Organization and pay the associated business registration fees for each LLC.
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Filing income taxes will require filing separate tax schedules with members’ personal tax returns for each LLC.
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Ongoing compliance formalities must be maintained for each LLC.
2. Limited Partnership
Another structure that real estate investors might choose is a Limited Partnership (LP). Real estate investors who seek outside investments from people or companies that do not wish to run the business may find this an attractive option.
An LP has at least one general partner and a limited partner. There may be multiple general partners and limited partners. General partners oversee and manage the business day-to-day, and they assume all responsibility for the business’s debts and liabilities. Limited partners invest money in the business but are typically not involved otherwise, except for partaking in major decisions that require partners to vote. Because of their limited involvement, limited partners are only liable for the business to the extent of their monetary investments.
Forming an LP requires filing business registration paperwork with the state. Real estate investors in the LP should also create a Partnership Agreement to detail the rights and responsibilities of general and limited partners and document ownership interests.
Common Mistakes Real Estate Investors Should Avoid
1. Not Transferring an Existing Property Deed to the Business Entity
Although this may seem like I’m stating the obvious, some real estate investors who have a property in their personal name forget to do this! After forming a business entity, the investor needs to sign a deed transferring the property to the business. Also, the deed must be recorded with the county where the property is located. Failure to do this may mean that the investor will legally remain the property owner personally—and, therefore, be the defendant in any lawsuit associated with it. If a business entity purchases the property directly, investors won’t have to worry about transferring the property deed because it will be in the business’s name from the start.
2. Not Insuring the Property Under the Business Entity
To protect property from liability and damage, investors should consider a comprehensive landlord’s property insurance policy in the business name. It’s critical to have written proof showing the business name as the entity insured, so the insurance company won’t have reason to deny coverage in the event of a claim. Investors who have registered separate entities for individual properties would likely need separate coverage for each one.
3. Not Keeping the Business Entity in Compliance
Suppose investors don’t maintain their business entities as required legally. That can put their personal assets at risk in a lawsuit against the business. Noncompliance pokes a hole through a business’s corporate veil, the protective shield that maintains legal separation between a business entity and its owners. Different states have different requirements. Regardless of where a business entity is located, real estate investors should keep their personal funds separate from those of their companies.
3. Corporation
A C Corporation provides personal liability protection for key stakeholders in the business, including shareholders, directors, and officers. Incorporating as a C Corp requires filing Articles of Incorporation, creating bylaws, establishing a board of directors, and possibly other tasks. Ongoing compliance also is more extensive than for the LLC structure.
Realize that tax implications of holding real estate in a corporation may become complicated, and possibly costly, with double taxation on some company profits. Do a Google search, and you’ll see articles that warn against incorporation as a way to hold real estate investments because of the tax ramifications.
4. Land Trust
In Florida, the Land Trusts can be set up by any individual, group of individuals, Limited Partnership, General Partnership, Limited Liability Company (LLC), a Trust Service Provider. The Florida Land Trust can be established for a number of reasons, most commonly to secure and protect the asset, as well as to ensure the privacy of the buyers.
For foreign buyers, the trust is slightly modified to comply with Internal Revenue Code Section 2501(A)(2) to avoid gift tax upon subsequent transfers. Land Trusts are designed, among other things, to provide flexibility as well as avoid the cost and inconvenience of probate or guardianship.
For Non-US Citizens, if the shares of the land trust are properly transferred in escrow to your successor beneficiaries potential estate tax, if any, may be avoided as well as the need to obtain tax releases in the event of death. Another benefit is that ownership within a Land Trust provides the lowest possible individual tax rate upon sale.
For a complete explanation on the benefits of a Land Trust, please click on the button below that will take you to our principal attorney law firm website:
If you are an investor in need of legal representation and legal counsel, consider speaking to LG TITLE & ESCROW. Have any questions? We have answers. Please contact LG TITLE & ESCROW at 954-317-1742.