Are there downsides to holding Real Estate in an LLC?

[artyler1]

This is not an area with which I have any experience or exposure, but I really thought I remembered, from CPE classes of days long past, and sources which I can no longer recall, or locate, that the recurring advice was, "Don't put Real Estate into an LLC!".  

But now I find myself in a situation where someone is asking my advice on the subject and, the little voice in the back of my head keeps saying, "Don't put Real Estate into an LLC!", but I don't know why not, and every resource that's come up when I've attempted to research the topic, seems to scream, "DO IT!!!"  

So, I'm looking for a little wisdom of the collective.  Is there a downside to holding Real Estate in an LLC?    

Or even better, Short of telling me it's because I'm losing my mind, Does anyone have any thoughts about what it is that's trapped back there in my grey matter, possibly slightly scrambled, that's making me think I remember, "Don't put Real Estate into an LLC!"?  Am I confusing LLCs with something else?   Or is it possible that that used to be the rule, based on circumstances at the time, and now things are different, and LLCs are a good vehicle?

[Just-Lisa-Now-]

I have the same thing in my head, I always see people say to never put real estate in an LLC.

[artyler1]

Thanks for keeping me company in my wrongness!  Maybe one day we'll either figure out where we heard/saw it, or why we're convinced we did!!!    😉

[Just-Lisa-Now-]

:smile:

[ehill]

I think it depends on the type of LLC it is.  Disregarded vs partnership vs C vs SubS.  Disregarded should be no difference except for the requirements when selling and making sure you keep the LLC active in the state.  The partnership and corporate structures are of course different and their own tax filings.

[Just-Lisa-Now-]

lots of different flavors of LLC's probably why my brain had it scrambled up!

[ehill]

Only thing I really watch for is the type of LLC.  Have had several thinking it was a disregarded and in reality it was a partnership.  Then they are surprised when they have to pay for a partnership return.

[abctax55 · Accepted solution]

You *don't* put appreciating assets into a Corp (especially a "C") because removing the asset is a taxable transaction, unlike with a LLC and/or partnership.  

Plus, with a C - there's the double taxation issue.

LLC's are generally the advised vehicle for real estate investments because of the limited liability component.  But, as Bill points out, if the LLC isn't handled/treated/managed as a separate entity that liability protection can easily be pierced.

[artyler1]

Thanks for the input, it certainly seems to be the prevailing thought.  I don't know why I was convinced otherwise.  
And that issue of not co-mingling funds, etc., is something I've always had to mention to these particular clients, because they, and family, have multiple operations ongoing, simultaneously, and the different accounts and records are practically incestuous, there's so much cross-over.  But now that they've created an LLC for one of the entities, and have been advised by their attorney to create a 2nd LLC for the real estate, I was sharing with them, advice I've seen, suggesting that the co-mingling of funds can be used as evidence that you and your LLC are not, in fact, separate entities, thereby shattering the liability shield, rendering your LLC useless.  

[Taxes-by-Rocky]

You mentioned the word "family" so naturally, one might consider a trust, a series LLC/LP or an FLP?  Similarly, if you are trying for simplicity, you might consider Rev. Proc. 2002-22 for mere co-ownership....all depending on the circumstances, of course.

[TaxGuyBill]

The general saying is never put real estate into a corporation (especially a C-corporation).  But there is generally nothing wrong with putting it into a LLC.

However, if you live in State that charges an annual fee for an LLC (such as California's $800 minimum fee), then using a  LLC may not be a great idea (especially a Single Member LLC).  A good insurance policy may be a better investment.

Also, most taxpayers don't treat a Single Member LLC as a separate entity and tend to mix personal and business together.  That very often will void the liability limitations of a LLC (that varies by State), in which case putting it into a LLC was just a waste of time and money.  In other words, the taxpayer needs to know WHY and HOW a LLC can be beneficial, and treat it accordingly.  There are countless people that form a LLC just because somebody told them to, and they have NO IDEA why or how to handle it.  If a person does that, the I agree, don't put it in a LLC as it won't benefit them.

[dd4vols]

In Tennessee and some other states, LLCs pay a Franchise Tax (based on the higher of Net Worth or Fixed Assets/Inventories/Real Property Rentals), so putting those real estate holdings in the LLC increases the Franchise Tax on the LLC...has no impact on the Excise(Income) Tax normally.

[qbteachmt]

You don't put property into a corporation that you will manage for purposes of rental income, because corporations require payroll. Otherwise, at least in MT, we always put property, other than personal residences, into an LLC; even RVs. For instance, you might bundle your residential rentals into different LLCs up to some value held in each LLC, such as $1m or $5m, as a segregation concept.