Client Question from Coffee and Qs Today: Buy as an LLC or individual?

CLIENT QUESTION from this week's Coffee and Qs with a Real Estate Agent 
Should I buy as an LLC or as an individual? 

It depends on if you are a first time buyer or not, and the products offered by your bank. The information below is not to replace speaking with an accountant, tax professional or lenders. 

Remember to shop around and make the banks complete by showing you all they have to offer before you make a decision. 

Today I shared the information about the benefits and challenges of each. Below I have compiled information from various sites related to the information I shared today. 

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This post is divided into 3 sections: 
1. The LLC method 
2. Understanding the changes caused by the new tax bill
3. The Asset Method

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THE LLC VERSUS THE INDIVIDUAL PURCHASER
Buying a House Under an LLC: Everything You Need to Know
(links to sources available at the bottom) 

LLC Overview
(visit irs.gov for more info on the basics of an LLC)
While there are both benefits and drawbacks, here are a few reasons to consider purchasing or refinancing a home under an LLC instead of your own name, including:

• Separation of personal and business finances.
• Liability protection.
• Pass-through taxation.

Funding
REMINDER: Separate personal from LLC funds. An LLC should pay for real estate purchases using its own funds so that there's no confusion with regard to who owns the property. This is because confusion could arise if the LLC disbands and divides its assets, or if the company is sued. However, LLC members may lend their own money to the LLC to purchase a property.
Benefits to Buying a House Under an LLC

1. In some states, LLC members may transfer their real estate properties to the business in order to receive a tax exemption.
2. A newly established LLC may purchase property to use as part of its real estate portfolio, which can add value to the business and bolster its financial profile.
3. An LLC may also earn income by leasing purchased real estate as residential or commercial spaces to tenants. As such, an LLC may exist solely to buy, rent, and sell real estate.
4. Another key benefit of buying a house under an LLC is privacy. It's difficult for someone to figure out how much you paid for a property unless they know the name of your LLC, which is why many investors who use LLCs don’t promote the name of their company, instead buying and selling discreetly.
5. Buying real estate under an LLC also provides asset protection. If you're ever sued in connection with homeownership, owning it under the LLC will protect it. For instance, if someone falls and injures themselves on your property and they sue, you might get a judgment against you. Since you own the property under the LLC and not yourself, however, your assets are protected.

REMINDER: Before you purchase a home under your LLC, be sure to hire an attorney who specializes in LLCs to ensure your Articles of Organization are properly filed. You can also avoid conflicts by getting feedback from other LLC members before making a real estate purchase or transfer.

Drawbacks of Buying Property Under an LLC

1. If you are a first time buyer, you may want to buy as an individual, unless you refuse to live in even a part of the property, because you cannot access FHA and most other state or federal programs designed to promote home ownership.
2. Interest rates on mortgages: Individuals also enjoy lower interest rates than LLCs.
3. Tax incentives exist for both, so you may want to compare your savings with both scenariois. There are special tax breaks on a primary-residence mortgage, including the fact that the mortgage is tax deductible on your personal income. Individuals can also deduct mortgage insurance on FHA loans from their taxes. Neither of these tax breaks is available if the property is owned by an LLC.
4. When you used an LLC to purchase your own home: There is a risk of mixing business with personal affairs when you've purchased your own home under your LLC, even if you try to run the two separately with different bank accounts, email addresses, and credit cards. It can be tempting to abuse the flexibility that comes with owning a home through an LLC, so it's important to keep a clear line.
5. When buying condos:  Certain co-op boards in apartment complexes are not fans of the idea of a company, rather than an individual human being, owning a condo in their building. But the kinds of attitudes you'll encounter depend on where you're looking to purchase. More old-school, traditional neighborhoods tend to not like the mixing of businesses and homeowners. Newer, up-and-coming communities, however, are more welcoming to these different financial structures.

Why Start an LLC for Real Estate?

1. LLCs create stronger protections from personal liability than liability insurance alone.

Some investors find the coverage for potential lawsuits created by the LLC's inherent liability protection is worth the effort of the startup. Others don't. This depends on the cost of starting an LLC in your particular state and the annual requirements you'll need to keep up with. If the fees and requirements are more than you want to deal with, you might consider finding liability insurance instead.

1. Especially with LLCs that have several transactions a year, with multiple sales and leases happening, there's plenty of potential for lawsuits, so you may find the work of an LLC startup worth the effort.
2. All real estate investors own personal property as well. Creating an LLC for your real estate investments keeps your personal assets nice and safe. This way, you can do your job and even expand your business with less worry.

 If a lawsuit does arise with one of your investments, the LLC itself is involved and liable, but its owners or members are not held personally responsible. The LLC's assets would be at risk, but the owner's personal property would not.
How Pass-Through Taxation Works With LLCs
Pass-through taxation allows a business to pass on its profits and losses to an owner. Corporations are not allowed to do this, but LLCs and sole proprietorships can. LLCs are the best of the 3 because an LLC has the same liability security as a corporation and enjoys the pass-through taxation benefits of the proprietorship.
Multi-member LLCs also enjoy pass-through taxation, but each of the members is required to file a Schedule C or K Form or Form 1065 when they file their income taxes. This form reports any shares of profits or losses they got from the LLC that year. The LLC itself is still not subject to taxation.
Starting an LLC for real estate purposes is a popular option for modern entrepreneurs. Thanks to the many benefits including liability protection and taxation.
 
UNDERSTANDING THE CHANGES CAUSED BY THE NEW TAX BILL
(effective until 2025)

The new federal tax law took away some benefits of homeownership but gave real estate investors a gift they might not be aware of yet.

Owners of investment property — from mom and pop landlords to big-time real estate moguls — could get a federal tax deduction of up to 20 percent of their net rental income for tax years 2018 through 2025. Most people who own shares in real estate investment trusts can also deduct up to 20 percent of their ordinary REIT dividends.

For homeowners, the new tax law has reduced the mortgage interest and property tax deductions for some homeowners, but these new limits do not apply to interest and property taxes on income property. As  a result, the new tax law increases deductions allowed for investors.

More importantly, real estate investors get a potentially large tax break they didn’t have before.
It comes under the section of HR1 titled “Deduction for qualified business income of pass-thru entities.” Congress “used the Facebook spelling” of “through,” quipped Paul Bleeg, a partner with accounting firm EisnerAmper.

Bleeg said the new deduction could increase investor demand for real estate, offsetting any potential drop in demand from homeowners.

The pass-through provision is insanely complex, but it essentially lets owners of pass-through entities deduct up to 20 percent of their business income on their personal tax return, subject to certain limits.
 
The first limit applies to everyone claiming the 20 percent pass-through deduction. It says your deduction generally cannot be more than 20 percent of your taxable income, excluding capital gains and the pass-through deduction itself. (Taxable income is your household income from all sources minus your deductions.)

If your taxable income is less than $157,500 (single) or $315,000 (married filing jointly), that is the only limit that applies. If your taxable income is above those amounts, then other limits apply, depending on the type of business.
 
 
This income limit would apply to real estate agents but would not apply to real estate investors because their principal asset is their property, not their skill, said Kenneth Weissenberg, chair of real estate services at EisnerAmper.
 
 
Luscombe said he believes Congress intended real estate investors who use Schedule E to qualify for the deduction, and a congressional committee report supports that idea.
 
 
OR THE ASSET METHOD 
List the property purchase as the purchase of an asset and then claim a deduction on the depreciation and expense of maintaining it. With this method, you are not deducting the entire purchase, but only the depreciation and maintenance expense.
 
SINGLE-ASSET ENTITIES 
Finally, the new law seems to indicate that when a private, single-asset entity sells its one asset (i.e., “substantially all the assets”), the capital gains from that sale would be excluded from the entity’s state taxable income.  This may inspire the creation of separate entities for each asset owned by an investor or group of investors. 
 
As with any exchange or other transaction, you should consult with your accountant or tax advisor to be sure that your transaction is structured in the best way to meet your investment objectives. 

Sources 
1. Upcounsel 
2. San Francisco Chronicle 
3. First Exchange (this links has info only related to Louisiana residents)