Holding Title to Real Estate and Limited Liability

Commonly real estate is held as personal property (single or jointly). Ownership forms for this include "Tenants in Common", "Tenants by the Entirety", or "Joint Tenancy". Without going into the details, all these ownership forms have one thing in common: they expose the owners to basically unlimited liability issues. This is especially risky when it is a rental property. Many real estate investors try to limit their liability by using a Limited Liability Company (LLC) to hold title and operate business related to the real estate.

The main benefit of an LLC is that it limits the owners' personal liability for business debts and court judgments against the business.

Additionally, the LLC combines liability protection with favorable partnership tax treatment. Although real estate ownership creates potential liability under mortgages, leases, environmental laws and other laws, real estate investors traditionally have avoided using corporations because they have considered taxation to be disadvantageous. Unlike a corporation (Inc), an LLC, if structured appropriately to qualify as a partnership for federal income tax purposes, is permitted to allocate tax items of income, gains, losses, deductions, and credits among its members in accordance with its "partnership agreement" (i.e., operating agreement or regulations). It becomes a "pass-through" entity for tax purposes (e.g., gains and losses are allocated to the members of the LLC).

There are no major differences in the federal income tax treatment of LLC's and limited partnerships. The principal advantage of the LLC over the limited partnership is the limited liability protection afforded all LLC members and managers. Limited partnerships are required to have one or more general partners, who are personally liable for partnership debts and obligations. The LLC affords limited liability protection to its members regardless of the extent to which they participate in management and control of the LLC business affairs. For details about setting up an LLC, you should contact an attorney.