Should You Buy Investment Real Estate in a Single-Member LLC?
Single-member limited liability companies, or LLCs, can be a great tool for real estate investments. Here’s what you need to know:
1. You don’t have to file separate tax returns for your single-member LLC. The LLC becomes a disregarded entity for purposes of federal income tax. If you own rental property in a single-member LLC, it gets reported on your personal income tax return (Form 1040). And if the single-member LLC is owned by some other entity, like a partnership, the LLC’s taxes are reported on the partnership’s income tax return.
2. You do, on the other hand, have to file federal payroll tax returns for your single-member LLC. If you have employees on payroll, you’re treated just like a corporation for purposes of payroll tax returns.
3. You have liability protection, similar to the liability protection you would get it if you were a corporation. If you own an apartment building in your own name and someone gets hurt there, YOU get sued. That is, you personally. You may have a ton of other assets in your name at risk – your homes and other investment property and whatnot – but you will personally be sued. That’s a lot of liability for you. If you have an LLC and you properly keep LLC business, income, and expenses separate from your personal matters, the LLC gets sued. And all the LLC owns is what you put in it, presumably just the one piece of real estate. By having a single-member LLC, you are protecting your other assets.
4. If you own investment property personally and sell it, you can do a 1031 exchange even if you set up a new single-member LLC for the purchase of investment real estate. And vice versa – meaning you can own investment property in a single-member LLC, and buy the new real estate personally. For more information on how 1031 exchanges work, click here.
5. If you have partners, a single-member LLC is not the way to go. A single-member LLC works only when you have a single member.