Practical real estate ownership.

• Author: Breuning, Daniel

For real estate investors, dealers, and operators, the risks associated with property ownership are often as important as the economics associated with the underlying investment. Property owners are also concerned about the tax complexities and costs associated with structured ownership and often assume that, if they are adequately insured, their legal risks are minimal (or even nonexistent). However, insurance does not cover all risks. Policy limits and exclusions can create significant exposure when faced with legal challenges that an owner may not be aware of. A single-member limited liability company (SMLLC) can provide property owners and investors with additional liability protection without creating additional tax complications, because there are no additional federal tax filing requirements.

Background

An LLC is a hybrid entity formed under the statutes of the state in which it is created and has benefits of both partnership and corporate forms of business. It can help insulate its owners from personal liabilities and claims associated with the LLC's activities. In addition to liability and asset protection, an LLC can also provide anonymity, because the ownership is not readily apparent to third parties. An SMLLC is an LLC with only one owner (member). For federal tax purposes, an SMLLC is generally treated as a disregarded entity (DE). As a DE, the SMLLC's activities are considered to be carried on directly by the single member, thereby eliminating the need to file a separate federal tax return (Regs. Secs. 301.7701-2(a) and -3(b)).

Benefits

Because an LLC is treated as a flow-through entity for federal income tax purposes, there is no tax at the LLC level. For individual ownership of an SMLLC used to own and operate rental real estate, the net income or loss is reported directly on the member's Form 1040, Schedule E (Supplemental Income and Loss). For corporate ownership, the SMLLC is considered to be a division of the corporation and is reported in the member's Form 1120, U.S. Corporation Income Tax Return, or 1120S, U.S. Income Tax Return for an S Corporation. If the single member is an LLC or a partnership, net income or loss flows directly to the partnership tax return, Form 1065, U.S. Return of Partnership Income. In each case, no additional federal tax return is required. However, since states...