How Should You Take Title to Real Estate?

I have been asked to explain the difference between the Title Holding Trust and the limited liability company.  This is a really good question, and a very common question that we hear often.  The Title Holding Trust and the limited liability company are often considered to be very similar, but they are actually very different and have few similarities.

However, before we go down that path, I think it is important to have a discussion of why you would want to set-up either.  There are many options available and it can be very confusing. 

Legal Disclaimer

You knew it was coming, didn't you?  I am an expert on certain tax-deferred strategies that generally involve the acquisition, holding and disposition of real estate through years of experience in the fiduciary services industry. 

I am not, however, an attorney or tax advisor of any kind, so you need to review this post and then consult with your own advisors to make sure that you are going down the right path that is best suited to your needs.

What are your objectives and why do you need/want an entity? 

This is a very important issue that you really need to think about, analyze and review with both your legal and tax advisors.  I have seen far too many real estate investors go crazy in trying to protect themselves from potential risk and liability of buying and owning investment real estate.  They significantly and needlessly over complicate their ownership structure. 

Often buying and holding title to investment real estate in their own name with really good liability insurance is probably their best bet.  Do not unnecessarily over complicate your investments and your life.

Evaluate Your Specific Risk and Liability

The most important issue here is risk and liability.  What is your risk?  What kind of exposure do you have in your day-to-day life?  Are you exposed to excessive risk because of your investments, your job, where you live (i.e. some states are more sue happy than others), your life style, etc. 

There are certain careers that have significant risk.  Real estate developers have huge risk and liability.  School teachers have minimal risks.  500 unit apartment complexes have significantly more risk than one single family residence.  You need to sit down and really try to understand your specific risk profile.  Your attorney can be a really good source of information here.  Attorneys have generally seen all types of risk and can help you understand what can go wrong and how likely it would be to occur given your situation. 

Reducing Risk with Entities and Advice of Counsel

Once you have decide that you do have a need to protect yourself from risk and liability you can begin to evaluate the various options available to you.  It is extremely important that you involve both your legal advisor and your tax advisor at this step of the process.  The best legal structure can sometimes create a huge income tax nightmare. 

You should also have other advisors review the structure for specific niche investments or strategies.  I have seen many legal and/or tax structures or strategies that are really good but do not work well or at all with 1031 exchange strategies.  So, if you are going to be structuring a lot of 1031 exchanges down the road, consult with your Qualified Intermediary to make sure the planned structure does not complicate your future 1031 exchanges.  The use of trusts, including the Title Holding Trust, may complicate borrowing, so consult with your real estate lender before moving forward.  It will be much easier down the road if you have already worked out the lending issues.  In short, build your real estate team now so that everyone is on the same page. 

Choosing How You Will Take Title

This is where it can get even more complicated and you will need the assistance of your legal and tax advisors even more.  Once you understand the risks that you face, you must choose the right method or structure for you to acquire, hold and dispose of your investment real estate.  Do not forget that you must have a plan of how and when you will sell.  Part of this process should be the disposition of the real estate and the effect it will have on your taxes. 

It can be an overwhelming process.  There are many issues involved.  There are legal issues, including risk and liability protection issues, and there are all sorts of potential tax issues, including Federal tax, state tax, local tax, licensing fees through the Secretary of State, estate planning issues, succession issues, etc.  It is not easy to balance these.  You need to evaluate your choices from the acquisition perspective, the holding and maintenance perspective, and the ultimate disposition perspective, the estate planning issue at death, succession planning. 

The first thing I would recommend doing is going back to the basics.  Ask yourself the question again.  Why am I doing this?  Would I be O.K. with buying and holding title in my name with really good insurance?  Remember, do not unnecessarily over complicate your structure and strategy unless warranted.

Methods for Holding Title

There are many ways to hold legal title to real estate and personal property, so this is a good place to start.  This alone could take pages, so I've provided a link to a webpage that will help explain the various methods for holding title to property.  This is not something that you should rush into, so take your time to think about the various methods and discuss them with your legal and tax counsel.

This is a good place to take a break and give you some time to think these issues over.  I'll come back and post part two about legal entities and discuss the difference between the Title Holding Trust and the limited liability company.