Buying 4th property... Tax Problems anyone?

[Marie S.]

I'm buying my 4th property (a duplex). I was told that once you purchase more than three properties, you need to form an LLC to protect yourself. I'm an accidental RE investor. It wasn't my intention to hop head first into this. It just kinda fell from the heavens. Do I need to form a company to buy more property?

[Ebere Okoye]

Here are my two cents. I usually advice my clients to form entities based on three factors - legal protection, tax reduction, compliance. For you, it's mainly the asset protection part of it you need to worry about especially if you have equity in these properties. Right now, the best one I see out there to use is the MULTI-member LLC with a GOOD COMPREHENSIVE OPERATING AGREEMENT/UMBRELLA POLICY. While I cannot exhaust this conversation on this forum, I will highlight the main advantages.

1. LLC's have the least compliance requirements. no minutes, BOD meetings, even no formal agreement but I strongly suggest using a comprehensive operating agreement. I currently use a 121 page one for my clients.

2. Multi-member LLC's can help in asset protection by dealing with bottom up creditors (has a claim and/or gets a judgment against the LLC arising from the acts or omissions of the company rather than from the acts or omissions of a member, manager or employee)
as well as top down creditors (gets a judgment against the member because of the member's acts or omissions, rather than the acts or omissions of the LLC, its managers or employees). With a good operating agreement and an umbrella policy, you can minimize(NOT MITIGATE) your exposure.

3. Multi-member LLC's tend to be audited a lot less that a single member LLC and because you have rental real estate, you will be filing a schedule 8825 rather than a schedule E.

So while you may not have all the asset protection you want, A good multi-member LLC with a carefully drafted operating agreement and an umbrella policy, taxed as an S corp is the best shot out there for a rehabber/flipper.

Your Entity structure should always start with your real estate strategy in mind and then drill down to the best structure that will solve all three issues (compliance, asset protection, tax reduction).

I hope this helps

I actually have a webinar coming up in two weeks to discuss why some people may have toxic llc's

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