How To Legally Hold Your Investment Property
Many people have recently been purchasing investment property, such as foreclosed homes that need improvement, vacant land, or even one-bedroom condominiums, hoping to make a profit in the future. Some purchase and then sell the same investment property within a few months, a method called “flipping”, while others keep a property for many years before selling it. Whatever the strategy, it is very important to know how to legally hold the property, that is, how to take title to the property.
The most common way people hold property is in their own names, either individually, or with others, such as a spouse. However, there are other ways to hold legal title to real estate, one of which is the LLC, or limited liability company, and its newest
variation, the series LLC. The LLC is used to hold property for a variety of reasons. First, it provides some anonymity because the deed to the property is not written in the individual buyer’s name, but rather the name of the LLC. That way, it is more difficult to discern who the individual owner of the property is. Second, and more importantly, the LLC is used to protect a person’s assets. The law provides that the owners of the LLC, known as “members”, are liable for the debts and actions of the company only up to what they have invested in it. This means that if a creditor obtains a judgment against a member, then the creditor is limited to collecting only up to the value of that member’s investment in the LLC. For example, John owns two cars, a boat, his principal home, and two other investment properties that he rents all in his individual name. A tenant of one of John’s investment property sues him and wins. Because John owns all of the property in his individual name, the tenant can make a claim against all of John’s property. However, if John placed the rental property in an LLC, the tenant would only be able to recover up to the value of the LLC, which would be the value of that property. By placing the rental property in an LLC, John is able to protect his other assets. Finally, the LLC has no negative tax effects because it is taxed as a “pass through” entity. This means that any income of the LLC passes through to the members and is filed on their individual tax returns.
In August of 2005, the Illinois legislature passed an Act that created the “series LLC”. The series LLC is like an LLC, but it can have a series of entities within it, not just one. Therefore, if you own multiple investment properties, you can place each property in a separate series instead of creating multiple LLCs. If done correctly, each series is treated as a separate entity and therefore debts and liabilities are enforceable only against the series to which they pertain. Also, each series can have different members. Therefore, one series may be owned by two people, another may be owned by those same two people plus two or three different people, or any number of members who may or may not have any membership interests in the other series. Also, each series may be treated as a separate LLC for income tax purposes. But why not just create an LLC for each property instead of creating a series LLC? The main reason is cost. It is much cheaper to create one series LLC instead of multiple LLCs. Another reason is manageability. It is easier to keep track of the series LLC when it comes to finances, accounting, membership, etc. However, it is important to remember that in order to be treated as a series LLC, each series must maintain separate books and records.
It is important to protect your wealth so that you do not risk losing it in your lifetime. Many people rely on their real estate properties as their source of retirement income. Holding multiple properties in your individual name exposes those properties to claims of creditors or judgments. This is why it is very important to avoid those risks by placing the real estate in an entity such as an LLC, or series LLC.