Why (and When) You Should Consider an LLC for Real Estate Investments
Are you thinking about investing in Pennsylvania real estate? If so, forming a Pennsylvania limited liability company (LLC) has numerous benefits that will save you time and money in the future.
Here are the top five reasons why the LLC has become the entity of choice for investment real estate ownership in Pennsylvania:
- Realty transfer tax implications and timing
If you plan on owning real estate in an LLC, timing is critical to avoid paying Pennsylvania’s realty transfer tax more than once. Realty transfer tax in Pennsylvania is 2% of the value of the real estate.
You should form the LLC prior to signing the agreement of sale, and the party entering into the agreement of sale should be the LLC, not one or more of the individuals’ names. The reason for this is that Pennsylvania’s realty transfer tax law provides that a taxable event includes an assignment of an agreement of sale, which would trigger transfer tax twice.
Further, if you buy the real estate in your individual name and later wish to transfer the property into an LLC that is owned by you, you would also be required to pay realty transfer tax on that transfer.
Creating an LLC from the outset would avoid paying more tax than you are legally required to pay under the above two common scenarios.
- Limited liability protection for owners of the LLC
The owners (known as members) of an LLC enjoy limited liability for the debts and obligations of the LLC and the negligent acts of other members. A member’s liability is limited to the amount of his or her investment in the LLC, and their personal assets would be protected in the event causing liability.
- Ownership flexibility
If you own real estate through an LLC, you can transfer ownership interests in the LLC without recording a deed and incurring associated costs and fees. This can be particularly helpful in an estate planning context or when bringing in or cashing out investors. Just keep in mind that if you transfer greater than 90% ownership in the LLC during a three year period, that becomes a taxable event subject to Pennsylvania realty transfer tax described above.
- Rights and responsibilities of owners and management
You can set up the LLC’s operating agreement to specifically define management responsibilities for a group of individuals who own real estate together so that everyone is on the same page as to what their obligations are from day one – this will hopefully serve to avoid conflicts down the road. Further, you can define specific requirements and restrictions on how membership interests in the LLC will be transferred and valued in the event of a conflict or other triggering event such as a voluntary transfer, death, or disability.
- Tax advantages
An LLC is flexible from a tax perspective, and depending on your circumstances, you can either be taxed as a disregarded entity, a partnership, or elect to be taxed as an S Corporation for federal tax purposes. This decision should be made in consultation with your accountant and your attorney, who can also advise on other potential tax benefits such as taking advantage of 199A deductions for qualified business income.
There are many good reasons to consider forming an LLC to acquire real estate in Pennsylvania. In order to determine the best plan based on your circumstances, contact us early in the process (and certainly before signing an agreement of sale!) to properly evaluate your options.