Buying real estate in the US is a great way to invest money. The US has one of the largest and most developed real estate markets in the world. Beyond the questions of what and where to buy, and how much to pay is the important questions of how to own your property investment. Federal, state, and local governments offer a variety of ways to own and operate investment properties. This blog looks at the advantages and disadvantages of owning real estate in a variety of ways including sole proprietorships, c corporations, s corporations and llcs.
Owning Real Estate as a Sole proprietorship
One of the most common ways to own is to put property in the name of the owner. The advantage of this method is simplicity; there is no need to file paperwork with the state to form a separate entity.
The downside to this kind of ownership is liability. People who own in their own name are personally responsible for everything that goes on with their property. If the property does not generate enough revenue to finance operating costs (mortgage, maintenance costs, taxes, legal judgments, ect) then the owner is personally responsible for debt incurred as a result of owning the property. Even more seriously, if the owner of property is sued, his personal assets are at risk. The other downside to owning property personally is that profits are taxed as personal income. This can be undesirable because corporate tax rates are often lower than personal tax rates. Corporations are also given opportunities to write off expenses that the IRS does allow for private individuals.
Owning Real Estate as a Limited Liability Company (LLC)
One of the major benefits of owning real estate is an LLC is simplicity. Single owners of LLCs do not need to file separate tax returns. Owners of LLCs can choose to be taxed as a sole proprietorship, S Corp, C Corp or partnership. This flexibility makes LLCs cheaper to operate than other corporate entities. LLCs have less requirements for keeping the company in good standing, which means less lawyer and accountant fees. LLCs give protection against liability and debt while retaining the simplicity of filing a tax return as a sole proprietor. If the company grows large enough then the company can change tax status to suit the company’s needs.
The disadvantage to owning an LLC is self-employment tax. Owners of LLCs are required to pay taxes on income generated by the LLC. This means making quarterly payments to the IRS based on estimated profits. However, if it opts for taxation as a C corp than it will be taxed entirely separately from its members (owners.)
Check back tomorrow to see part 2.