Hi there. My partner and I are new to investing and we found a "buy and hold" property in Minnesota and are buying it cash 50/50 each. Can we buy it under two LLCs? Or should we just use one? We want to buy the house in the best way to get the smartest tax benefits for each of us (while we own the house and when we sell). Any insights?
Welcome to BP! I don't know that you would see any difference in taxation between using one, two, or even zero LLCs. Since an LLC is generally a passthrough entity, many investors use them for liability protection rather than tax benefits.
I'm not an attorney or CPA, so absolutely take my thoughts for what their worth.
Not sure if you can or not, but even if you can, I wouldn't want two LLCs. First, at least in my LLC, it's just a "pass through". Meaning there aren't really any tax benefits. Any profits/losses are "passed through" to my personal statement. That may not be the case in your state, or maybe your CPA is better than mine? Either way, I don't of any benefit.
Secondly, the primary benefit of an LLC is typically thought to be asset protection. Meaning, if something to do w/ your property is deemed your fault and you get sued, only the assets held by the LLC can be taken and not your personal property. If the veil of the LLC is pierced, then that goes out the window. So what happens if one LLC is "pierced" and the other not? I have no idea, but the point is that you're opening more entities up to be scrutinized and potentially taken advantage of.
Hope that makes sense, and hopefully that's all correct. It's the way I understand it though, so someone please correct me if wrong. If I am correct, I don't see a benefit.
Thanks everyone for the fast responses! I have only read one book and watched one webinar on Bigger Pockets thus far and have a LOT of educating to do! It would be a pass through LLC. And if I'm reading correctly - the LLC really doesnt affect the taxes. SO - next question - maybe for another post - What kind of tax benefits should I expect or be looking for by owning a rental property? I've read about new tax laws and don't understand any of it. I am 1099 myself for my career, so not sure if that affects anything?
@Sarah M. There will be no tax advantages to having separate LLCs. When purchasing with a partner (in an LLC or not) you will be required to file a corporate return unless you purchase the property as tenants in common (TIC). If I were in your shoes I would purchase it in a single LLC with you and your partners as 50/50 owners. Simple and easy. There are some benefits to TICs but that is another discussion.
@Sarah M.- I'm doing the exact same thing on a flip in Michigan right now. We talked to a CPA and decided it would be best to Create one LLC where we own 50% each. This made it simple, we have a separate partnership agreement that outlines how decisions are made, who is responsible for what, etc. It's more of a fall back than anything to protect if things go wrong. I think this is your first flip that is what I would recommend that. It's simple and easy.
As for your second post about the tax benefits you should expect, one of the big ones for a buy and hold is depreciation and being able to write off nearly all work being done on the property. I would recommend keeping ALL of your receipts and tracking expenses. Including if you use a property manager, buy new appliances, etc. I'm still fairly new as well but have one rental property and that I have filed taxes on one time but have not had to do that on a partnered one yet. Feel free to reach out if you want to chat more as you go through this experience.
Second, @Dustin Beam and @Thomas S. and are correct in the strict sense of your question - no tax advantage. One or multiple LLC's are not going to do much from tax perspective for you, it's a legal concept - an LLC can be taxed as a pass-through, S-corp and C-corp (but you don't want to own real estate in a S or C corp).
But they are wrong that you don't need an LLC. Since you are buying with cash and you have a partner, both are solid reasons to implement asset protection. If you had a mortgage (the note itself acts as a litigation deterrent) and little equity, an LLC might be overkill. Regardless, with a partner you double your risk (what happens if your partner hits someone with his car and destroys 3 other cars and/or puts someone in hospital for a good while? he gets sued and everything he owns is at risk, including your share in the rental) and you need asset protection. Again, in your case, you have double reasons to implement asset protection.
Now, if it's better to implement an LLC with 50/50 share or have your own LLC partner with him or his LLC I'm not sure - you need specialized advice - talk with @Scott Smith. But I'm pretty sure you'll want asset protection for your scenario.
I would suggest researching and then talking to an accountant about the potential tax benefits of doing your 1099 work inside of an LLC which is taxed as an S corp. This would be separate from any LLC which holds real estate. Just something to consider.