Choosing a Legal Entity for Real Estate Investing
Here’s what I know: it’s imperative to purchase your rental properties under a legal entity. Doing so provides legal protection to your personal assets.
Why is this important? Let’s say, god forbid, that someone slips and falls at one of your rental properties and decides to sue you. If you own the property personally, they can go after all of your personal assets, including your home and your children’s college funds. Yikes. A legal entity protects you personally.
Also, it’s much more tax-friendly to purchase properties as a legal entity instead of an individual. When your investing becomes a business, it is taxed as so. Businesses don’t pay taxes on the money they spend on business expenses. Any legitimate business purchases can be tax write-offs. Additionally, my favorite accountant, Tom Wheelwright calls depreciation magic!
There are many business entities to choose from: LLCs, sole proprietorships, S-Corps, C-Corps, etc. Personally, I’ve been advised to establish LLCs, because it limits liabilities. I think you’ll find that many accountants and lawyers will tell you that owning rental properties inside an LLC is the best option.
I’ve also been advised to set up the LLCs in the states where my properties are. I’ve also been instructed to hold approximately $150,000 worth of property in one entity. For us, that’s about three rental properties. Then, all of our LLCs report to a holding company.
Again, seek the counsel of your own lawyer and accountant to make the best decision for you and your real estate business.
We get tons of questions about this topic. Natali and I recorded an entire live stream about business entities! We answered questions about getting a mortgage in an LLC, liability insurance, and more. You can find that video here.