Most people form an LLC (i.e. Limited Liability Company) to hold and manage their real estate for two reasons.  First, if the LLC is formed correctly and there is a claim or lawsuit relating to the real estate, then typically, only the assets owned by the LLC, and not the taxpayer’s personal assets, are subject to the claim or lawsuit.  Second, an LLC provides tax advantages over other entity choices.  For example, the profit or loss from an LLC with only one owner can be included on the taxpayer’s tax return, and the LLC may not have to file a separate tax return.  By contrast, a corporation would have to file a separate tax return.  For more information about the tax benefits of forming an LLC, visit http://test.huddlestontaxcpas.com/library/use-llc-for-real-estate-investments/.

Forming an LLC is a relatively simple process.  In most cases, the application can be filed online with the state.  You will need to know the name of your business, the information for the members of the LLC (such as, names, addresses, and social security numbers), and the company’s contact information.  You will generally pay a filing fee, which varies from state to state.

You can Google LLC, and you will find many companies that will create the LLC for you (for a fee).  You will need the same tax information, however.  Alternatively, you can Google your state name and “Secretary of State” to find your state’s online form.  It is also best to create the LLC in your own state.

In order to gain the maximum protective benefits from an LLC, many taxpayers transfer the property to the LLC, so the LLC becomes the legal owner of the property.  If the title is not transferred to the LLC, and there is a lawsuit against the property, the taxpayer may be personally liable.

A properly formed LLC will generally protect the owner’s personal assets from lawsuit or claims against the LLC, but it will not protect one asset owned by the company from being used to satisfy a claim relating to another asset owned by that LLC.  In other words, all assets owned by the LLC are potentially subject to any claim against the LLC.

For example, if an LLC owned several properties and someone is hurt at one of these properties, then the person could sue the LLC. Consequently, all of the properties owned by the LLC could be used to satisfy the judgment – not just the property where the person was hurt.  Therefore, the LLC could potentially lose everything from a lawsuit relating to only one of its properties.

To avoid these risks, taxpayers can form separate LLCs for each property owned.  There are many factors to consider when making this choice.  Some of these factors are the number of properties owned, the locations of the properties, and the way the properties are financed.  You must also consider the costs and administrative burdens associated with forming and maintaining numerous LLCs.  You should discuss these issues with your tax accountant or CPA.
Call us if you need advise from a good tax accountant.  We serve Seattle, Bellevue, Federal Way, Everett and the surrounding areas.

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