With the real estate market in many parts of Massachusetts booming, you may be thinking about purchasing an investment property. Whether you plan to buy a commercial building or residential units, investing in real property is often an effective way to diversify your overall portfolio. Before you make an offer on a parcel, however, you must think about ownership.
You have a variety of legal options. When purchasing investment properties, though, savvy investors routinely choose to form limited liability companies. Before deciding whether an LLC is right for your real estate purchase, however, you must carefully weigh the advantages and drawbacks of this type of business form. Here are four benefits of creating an LLC to hold your investment property.
1. Safeguard your personal assets
As you likely know, buying property can be risky. If you would rather not put your personal assets on the line, forming an LLC may be a brilliant idea. With LLCs, you typically only jeopardize personal assets equal to the value of your ownership share in the LLC. The company is responsible for liabilities beyond that amount.
2. Take advantage of pass-through taxation
When deciding whether to purchase an investment property, you must think about taxation. With an LLC, you can likely take advantage of pass-through taxation. Rather than paying corporate tax on profits, you report income from your investment property on your individual tax return. As such, this approach may simplify your tax filing.
3. Insulate yourself from lawsuits
As the owner of investment property, you should plan to face some disputes with tenants, vendors and others. By placing your property within an LLC, you may avoid becoming a defendant in a potentially costly lawsuit. That is, if someone chooses to sue, the LLC becomes the logical defendant.
4. Transfer ownership effectively
Finally, by using an LLC to purchase investment property, you may simplify the transfer of the property, should you decide you no longer want it. Rather than going through the hassle of deeding the property to another person, you may be able simply to assign your ownership interest in the LLC to a third party.
While there are many key advantages to using an LLC to purchase investment property, there may also be some unavoidable drawbacks. Whether an LLC is right for you likely depends on your overall goals. Nonetheless, for a simpler way to buy rental property, an LLC is often tough to beat.