Would I benefit from an LLC if I invest in RE thru Syndications

Question

Hi All! I'm new to bigger pockets. I've been investing in apartments for the past year. I invested in one deal as a Limited Partner and one as a General Partner. I'm about to invest in one more as a GP. Usually all deals form an LLC and add all the investors as members of the LLC. The property gets aquired by that LLC and the investors get a K1 at the end of the year. I've been taking the K1s and filing taxes along with my W2 (thru Turbo Tax). I'm wondering if having an LLC (or any other entity type) of my own help? Can I invest in deals (technically other LLCs) thru my LLC? I take a few real estate classes and pay memberships to a few real estate groups, can I write them off only if I have an LLC, or can I do it personally? Thanks in advance for patiently answering my question.

PS: I don't have a CPA, and I'm in the process of getting one, but I wanted to get a frame of reference so I can roughly compare notes with anything my future CPA would propose.

Nathan Gesner · Answer

I recently invested in a large syndication and have 1% ownership. Let's pretend someone slips and falls, ends up in a wheelchair, and sues for $5 million. Their claim will be negotiated down and settled for much less, and it will almost certainly be covered by insurance. If insurance doesn't cover the settlement and an additional million is needed, I'll be responsible for $10,000 (1% ownership).I've been on these boards for nearly 15 years and nobody can provide an example of a landlord being sued for so much that they lost their investment and impacted their personal finances. It is extremely rare and not even worth putting effort into additional protections. If someone is concerned, I recommend they buy umbrella insurance and call it a day.

Kelly O'Keefe · Answer

@V Reddy First, setting up an LLC to invest in real estate is generally to limit personal liability and for asset protection (select "magnifying glass icon" in top-right corner and search "LLC", you'll get a lot of feedback). In the case of a syndicate, the LLC and its operating agreement help to formalize the legal relationship between investors. Do each of the individuals investing in the syndicate need their own LLC? It depends on the syndicate and your personal preference. You don't need an LLC to write-off legit business-related real estate expenses. Based on what you said, I'm going to assume that you aren't the person responsible for coordinating and filing the taxes for the syndicate. This also includes making sure the K-1s are distributed to investors. - let me know if I misread this. The syndicated LLC tax returns should not be filed on TurboTax. Yes, you need a CPA/EA to understand your responsibilities as a GP of a syndicate and also the tax optimization strategies that may be available to you, or not available in the case where you are an LP. . . . *This post does not create a EA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.

Nathan Gesner · Answer

LLC is a pass-through entity, meaning there's no tax benefit. The purpose of an LLC is for anonymity or legal protection. Neither is necessary when investing in a syndication. The lawsuit will be against the syndication and your exposure is the same whether you invest personally or under an entity.

Gino Barbaro · Answer

@Nathan GesnerIf the lawsuit is originated from the individual, then having your LP interests in an LLC would protect you. We always think of the property being litigated, but if you are in a lawsuit, then all your assets are at risk, and having your LP investments in an LLC would be a huge benefit.May be a bit of overkill for most investors, but still good to know

Kory Reynolds · Answer

From an income tax perspective, the LLC provides you with absolutely no benefit.Even from a "anonymity" perspective - if that is a Single Member LLC, the K-1 from those syndicates is still required by the IRS to be issued directly to the beneficial owner - you.If you don't make it a single member LLC, say your spouse is also a member, now you have a partnership tax filing - if it holds a number of LLC interests, it is now a partnership filing that is a pain to file to roll all of those activities in and report it on to your personal returns.In short...most likely it is best to keep it simple. Just own it directly unless there is a real business or other investment reason not to do so.

Account Closed · Answer

Short answer is no, not much if any benefit. Syndications are setup as limited partnerships so your only putting at risk the initial investment amount at most.

Todd Dexheimer · Answer

I wasn't clear. What I meant to say, it that I think what Gino meant to say is that if you get sued personally, for anything, your LP shares would be more protected if they were in an LLC. This is not meaning if the investment gets sued, but if you get sued personally. Let's say you get sued by your neighbor for your dog biting them in the butt for $1mm. If your LP interests are in your LLC, then they would have a more difficult time going after them.

Ashish Acharya · Answer

Investing in syndications through an LLC can help organize your investments. However, it may not provide significant tax benefits if you don't get REPS status. If you get the REPS and meet 500 hours managing your own materially participating LTRs, your LP interest can benefit you. You can generally deduct real estate classes and memberships as business expenses without an LLC, as long as they relate to your investment activities. An LLC could simplify bookkeeping and structure your growing investments, but its main advantage would be in organization and liability rather than immediate tax savings.

Nathan Gesner · Answer

I don't know how that's possible. If someone sues the property owner, they would sue the syndication, not the individuals with partial ownership. I don't think there's any way for an attorney to identify partial owners. And how would they go after Gino and not the other partial owner with 0.6% ownership interest? Or the owner with 13% ownership interest?

Todd Dexheimer · Answer

I think Gino meant that if you get sued personally and your LP interests are in an LLC, it would be more difficult for them to go after your LP interests. Attorneys that I have spoken with tell our investors all the time that they can invest individually or through an entity, but it makes no difference.