Investor Real Estate Accounts

For real estate investors to keep track of their properties rental performance and tax information in one place.

Legal Ownership Structure

Tax Implications of Legal Ownership Structure

The default mode of ownership is proprietorship by the individual. From an income tax point of view, the owner of the property is taxable on his net income, and there is no tax benefit in owning through a corporation.

Different entities other than individual can bet set up to own property:

  • a partnership is a pass-through entity, and therefore, the tax treatment is the same as for sole proprietorship. A partnership allows several persons to share the benefits and responsibilities of ownership without changing their tax position.
  • a corporation is viewed as separate taxable entities. Owning real estate through a corporation is inefficient from a tax standpoint because the corporation needs to pay the income tax. Then, the corporation owner will be taxable on any profits distribution distribution (dividends) from the company. This means that corporate activity is taxed twice.
  • a trust is an entity whose objective is to hold and invest money or property held in the trust for the benefit of the beneficiaries. A trust is taxable. To avoid giving incentive for high income individuals to park their income producing assets into trusts, the income tax rate for trust quickly escalate to a level similar to the highest tax bracket for individuals.

Corporations shares can be sold and transferred easily, but distributed profits end up being taxed twice.

Limited Liability Companies (LLC) are viewed from a tax standpoint as partnerships unless they elect for corporate tax treatment.

For this reason, few corporations own income real estate in the US except in cases where tax on transmission matters more than taxation of profit (Estate). Most income properties are owned directly by individual or through a single member LLC or partnership LLC.

If a LLC belongs to a single member or a couple filing jointly, LLC income can be included on the individual tax return, so there is no filing requirement for the LLC at all: SMLLC gives you liability protection with reduced tax preparation burden. For foreign owner however, form 5472 needs to be provided with the 2017 return returns, and full accounts need to be kept for each LLC one owns.

Legal Implications and Liability Protection

From a legal liability point of view:

  • companies are independent judicial persons and its employees and shareholders have liability protection
  • sole proprietorship and partnerships (not limited liability partnership, LLP) are liable for any tort arising in the course of the activity.

Companies, whether they be corporations, partnership or single member LLC are separate legal person and afford liability protection. If the proprietor or partners own the property through a LLC, they will benefit from liability protection.

The liability protection afforded by a LLC has several limitations:

  • no protection for member criminal activity (The owners of a LLC are called members.)
  • no protection for member from other liabilities arising outside the scope of the LLC

Even worse, the LLC liability protection may be disregarded by a court if they determine that it was a sham corporation. Factors leading to this are:

  • LLC did not pay its fee to the state of incorporation every year,
  • members commingled the LLC funds with his own, it should be clear what the LLC property and what member property is, this means that you either get a property manager
  • members did not respect some forms, such as redacting an Operating Agreement, and signing contracts related to the property "for and on behalf of the LLC" with LLC Name, Person Name, member, rather than in their own names.

You can get further advice from a lawyer concerning liability protection.

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