Basic Considerations When Buying and Selling Real Estate as an LLC
Updated: Apr 29, 2021
The limited liability company (LLC) is a popular entity used by real estate owners and investors to hold title to property. This post contains a brief overview of the factors one should be aware of when utilizing an LLC to buy and sell real estate.
Personal Liability Protection
If you own property in your individual name and get sued, then your personal assets will be at risk. If you own property as an LLC, however, you will be shielded from personal liability for acts performed by or contracts entered into on behalf of the LLC. This is because an LLC is legally distinct and separate from its owners (referred to as “members”). So, in a lawsuit related to the LLC, only the assets of the LLC are at stake, and not the personal assets of its members.
There are, however, situations in which personal liability might exist for an LLC member. This includes:
Failure to Follow Corporate Formalities – If an LLC fails to follow corporate formalities, a court may “pierce the corporate veil” to impose liability for an LLC’s debts and obligations on its individual members.
Corporate formalities LLCs should observe include:
- Keeping personal funds completely separate from business funds
- Holding regular board meetings
- Keeping board minutes
- Adopting bylaws
Personal Guarantees – If an LLC member personally guarantees a company debt, that member will be personally liable if the LLC defaults on its obligation.
Fraud – If an LLC member commits fraud or conducts themselves improperly, they cannot use the LLC to shield themselves from personal liability.
Environmental Issues – If there are environmental issues associated with a property owned by the LLC, the LLC members may be personally liable to cure those issues.
In addition, real estate investors who own multiple properties should have a separate LLC for each property. This way, each property is insulated from the other. In other words, one property’s assets will be protected from issues that arise with another property.
An LLC is a “pass-through” tax entity, meaning profits and losses flow through the LLC down to its individual members, who report this information on their personal tax returns. Unlike a corporation, an LLC itself does not pay federal income taxes.
Notwithstanding, LLCs still may be subject to state and federal capital gains taxes upon the sale of a property. A 1031 exchange is one method real estate investors may use to defer capital gains taxes. A 1031 exchange allows a taxpayer to defer capital gains from the sale of one property by reinvesting the sale proceeds into a like-kind property within a certain period of time. Such exchanges are appealing for investors who wish to retain a property's equity for re-investment.
The information contained in this post is for informational purposes only and is not intended to serve as legal advice. If you have any questions about the information contained in this post, please email us at email@example.com or call us at 201-595-0399 for a free consultation.