What is the best legal structure for holding rental real estate?

What is the best legal structure for holding rental real estate?
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#1

My parents have a 5 rental properties that they currently hold in their name. What is the best type of legal structure to hold these properties that would limit liability and minimize the tax burden one day if they wish to leave these properties to their children?


#2

Holding each property in its own LLC would offer the most liability protection but in states such as CA their is an annual fee of $800.00 for each LLC(4K).   There is a new breed of LLCs called series LLCs that offer the same individual protection under one LLC but they have not been fully vetted by the courts yet so best to wait.

Without knowing the state or gross receipts of the properties it is hard to say but do not put them in a corporation S or C. 

Estate Planning:  If your parents will be subjected to estate taxes there are more planning opportunities with an LLC or 5 separate LLCs.

The default answer for how to hold real estate is almost always LLC because the asset(real estate) can be distributed without triggering a realizable gain (taxable gain).  However, real estate put into corporations will get locked in.  The other benefit is something called a charging order that applies to LLC.  If someone wins a judgment and takes ownership of your LLC's interest they will be unable to manage it. In short, they could own the LLC but never get a dime form it. 

The other option might be to take out liability insurance and keep them all in your parent's name. 

I recommend talking to your tax Advisor before making any moves.  Always ask a lot of questions. If they down play your questions or you sense their answers don't make sense get a second opinion. 

   


#3

Agree. LLCs.

Liability

The LLCS limit liability to the corporation and protect your parent's assets in the event that a tenant or their guest sues them. Remember, that the LCC sued, so that that the corporation will need commercial insurance to protect against claims.

Estate planning

Share ownerships (or percentages of ownership in an LCC) are a good way for your parents to make yearly taxable gifts to their children of shares of their rental properties. They keep management control and voting rights in the LLCs, but their children get shares of ownership. If you parents have enough money so that they owe federal or estate taxes, gifting can be a good way of gradually moving a portion of their rental properties out of their taxable estate.


#4

You could either use an LLC or a family limited partnership. Practitioners have different reasons for either. I like the family limited partnership the best.

Either way, by putting the 5 properties into the entity, you now have the ability to manage the properties as an entity. You can do some tax planning and it provides a way to give incremental shares of the entity to children.

Unless your parent's estate is greater than $10 mil, you probably don't have to worry about estate taxes. But you do have to be concerned about income taxes. The entity may give you a way to pay college educations in a lower bracket.

Regardless, this is a good planning step.

Hope this helps.


#5

Limited Liability Company. For every different rental property you purchase, form a different LLC. You don't make a tax election, you leave it as a disregarded entity


#6

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