EasyAnswers TIPS FROM AN ATTORNEY TO PROTECT YOURSELF — AND YOUR INVESTMENTS
When it comes to your real estate investing business, asking questions is part of the job, especially during tax season. Think Realty Resident Expert, financial advisor, and attorney Clint Coons offers his advice to questions he hears from clients every day.
Q: I was told to use a disregarded LLC to hold a commercial property I am thinking of purchasing. Do you agree?
A: Yes and no. You will want to hold the title to your commercial property in an LLC, but I would not set it up as a disregarded entity. This is a common mistake made by real estate investors who do not understand how lenders look at entities. Let’s assume you stabilize this property and the value doubles. You decide it’s time to cash in and you look to sell. If your entity is set up as a disregarded LLC, then it is not filing a tax return. This may be great from an annual cost standpoint (you save $1,000 each year), but it can be devastating when you are looking to cash in. The buyer’s lender needs to verify the property’s income and expenses. When the LLC does not file a tax return, it is difficult for the underwriter and poses risk. It’s far better to set up your LLC to be taxed as a partnership or S-Corporation so you file a return each year. When you are ready to sell, the return will make your exit that much easier.
Have a legal question that might affect your REI? Send questions to Think Realty’s editor at firstname.lastname@example.org.
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