Benefits of owning property in an lLC

Oct 27

One of the first questions I ask my buyer clients is “How do you plan on holding title?” That means who is going to own the property? Who is the legal owner? This is something that needs to be thought about before you write an offer.

Will you own it in your name?

Will you own it in a trust?

Will you own it in an LLC?

We are going to be talking about the reasons someone would own property in an LLC.

Let me start by saying that any individual or couple can start an LLC for owning property. You do not necessarily have to have a business to do so.

Limited Liability: Owning property in an LLC (Limited Liability Company) in San Francisco can help protect your personal assets from business liabilities.

The name itself, "Limited Liability Company," hints at its primary benefit. When you own property through an LLC, it's considered a separate legal entity from your personal finances. Here's how it works:

Separation of Assets: Your personal assets, like your home, savings, and investments, are distinct from the assets owned by the LLC

Liability Is Limited: If the LLC faces legal issues or debts related to the property, your personal assets generally cannot be used to satisfy those obligations. This separation of liability is the core protection offered by an LLC.

Protection from Lawsuits: In the event of a lawsuit related to the property, the liability of the LLC is typically limited to the assets held by the LLC itself. Your personal assets are shielded from being used to settle the LLC's debts or legal judgments.

If you own multiple properties consider placing each property in its own LLC

Concept of-Asset Ring-Fencing: By holding each property in a separate LLC, you can further ring-fence each asset. If one property faces issues, it's less likely to affect the others within different LLCs, providing an added layer of protection. Think tenant issues…one property cannot be held liable for another

Contractual Liability: Even in contractual matters, your personal assets are generally safe when you own property through an LLC. For example, if the LLC enters into a lease agreement, it's the LLC's assets that are at risk, not your personal ones.

Maintaining Formality: To ensure this protection, it's essential to maintain the formalities of the LLC. This includes keeping separate financial records, having a separate bank account for the LLC, and not commingling personal and business funds.

I absolutely do not recommend going online and creating an LLC by yourself. What exactly is the point of that? Get your self a lawyer that creates LLCs in San Francisco or California to educate you on the laws and rules. Then get yourself a CPA to do the taxes and accounting for your LLCS.

Which brings me into Tax benefits

Disclaimer, I am not a CPA and I am not giving tax advice AT ALL. This is to get you thinking about LLCs and doing your own research and then speaking to the right professionals.

Pass-Through Taxation: One of the significant tax advantages of an LLC is its default tax treatment, known as "pass-through" taxation. This means that the LLC itself does not pay federal income taxes. Instead, the profits and losses "pass through" to the individual members (owners) of the LLC, and they report this on their personal tax returns.

Flexibility in Tax Classification: While the default tax status of an LLC is pass-through, LLC owners have the flexibility to choose how they want their LLC to be taxed. This flexibility allows you to tailor the tax treatment to your specific financial goals and circumstances. Here are two common tax classifications for LLCs:

Single-Member LLC: If you're the sole owner of the LLC. You report its income and expenses on your personal tax return
Multi-Member LLC: If your LLC has multiple members, it is typically treated as a partnership for tax purposes. The LLC itself files a partnership tax return and each member receives a Schedule K-1 that outlines their share of the LLC's income or losses, which they report on their personal tax returns.
Deductions and Write-offs: LLC owners can often take advantage of various tax deductions and write-offs related to their real estate investments, such as mortgage interest deductions, property depreciation, maintenance expenses, and property management fees. These deductions can help reduce your taxable income.

Caveat, to have deductions you must have income. So if you are planning to rent out your property this is huge.

Capital Gains Tax Benefits: When you sell a property held in an LLC, you may benefit from favorable capital gains tax treatment. If you've held the property for more than one year, you can potentially qualify for long-term capital gains rates, which are typically lower than ordinary income tax rates.

1031 Exchange: An LLC can facilitate a 1031 exchange, also known as a like-kind exchange. This allows you to defer capital gains taxes by reinvesting the proceeds from the sale of one property into another of equal or greater value, as long as certain IRS requirements are met.

Tax Credits: Depending on the type of real estate investment you're involved in, there may be tax credits available at the federal or state level. For example, some historic preservation projects or energy-efficient property improvements can qualify for tax credits.

Estate Planning: Owning property through an LLC can also offer estate planning benefits. You can plan for the transfer of ownership to heirs or beneficiaries with reduced estate tax implications.

To maximize the tax benefits of owning property in an LLC work closely with a tax advisor or CPA who specializes in real estate taxation. They can help you structure your LLC and investments in a way that aligns with your financial goals and optimizes your tax position while ensuring compliance with San Francisco and federal tax laws.

Let's talk about loans.

Loan Type:

Personal Property: When you own a property personally, you can obtain a standard mortgage. The terms and conditions are based on your personal financial qualifications.
LLC-Owned Property: For an LLC-owned property, you typically need a commercial mortgage or investment property loan. These loans are designed for business entities and may have different qualification requirements and terms.

You can buy the property as yourself and then do a grant deed to transfer it to an LLC at a later date.

Interest Rates:

Personal Property: Personal mortgages often come with lower interest rates compared to commercial mortgages. Lenders usually consider personal mortgages to be less risky.
LLC-Owned Property: Commercial mortgages for LLC-owned properties may have slightly higher interest rates because lenders perceive commercial loans as riskier due to the complexities of business ownership.

Down Payment:

Personal Property: Personal mortgages often have lower down payment requirements, making it easier for individuals to purchase a property.
LLC-Owned Property: Commercial mortgages for LLC-owned properties typically require a larger down payment, often 20-30% of the property's purchase price. Lenders may expect a greater financial commitment from the LLC.

Qualification Criteria:

Personal Property: Personal mortgages are primarily based on the borrower's creditworthiness, income, and personal financial history.
LLC-Owned Property: For an LLC-owned property, lenders will assess the financial health of the LLC, which may include reviewing its credit history, cash flow, and business plan. Personal credit scores are generally less important when the LLC itself is the borrower.

As always

Consult Experts: Consider consulting with legal, financial, and real estate professionals who are well-versed in San Francisco's real estate market and LLC regulations.