Re: Don’t Form A Corporation To Buy Real Estate - Posted by ccreed
Posted by ccreed on August 12, 2002 at 16:03:43:
I would agree with your acct. to a point. We conduct one of our RE partnerships in an LLC. The overhead and tax treatment of C corps. can be prohibitive. The LLC has its pluses and minuses. If I had a do-over I would be strongly inclined to hold RE in a land trust. These are variously called Illinois land trusts after the state which created a lot of the statutes that became a model. Not being an atty. I couldn’t say whether the land trust is now generally standardized like the UCC. (“Generally” meaning “everywhere but Louisiana”.)
In any case, it’s just a trust. So there are some complications and red tape. But I think it could be the best vehicle for RE holdings, from the standpoint of privacy, flexibility and liability.
One area where being an LLC has hurt us is that there’s no pro se appearance in court. Which means every time we have an eviction that goes to trial, we have to hire an attorney. Fortunately we have an atty. who cuts us some slack for doing the filing and legwork ourselves, but it still costs us $200 a pop to put our shiny scrubbed faces in front of the bench. AND we have to show up personally anyway, we don’t get a bye ‘because my attorney is handling it’. Worst of all possible worlds. But the LLC is a pass-through entity?a partnership for tax purposes.
One nice thing you can do is sell the interest in a trust or LLC without disturbing the title to the underlying RE asset. Yeah, yeah, due on sale, blah blah blah. It?s well established in law (but don?t ask me for citations) that interest in a trust is personal property, not realty, EVEN IF the asset is realty. And you can do clever stuff like sell a partial interest and retain some equity participation, with maybe a buyout agreement down the road, if you?re into complication. (N.B. record the agreement.)
Bill Gatten has more to say about this in his PACTrust materials.
The thing about double taxation is, well, you have to consider how much money is flowing through the entities. For example, it could be that your corp. winds up being taxed at a lower rate because its net profits were lowered by, among other things, salaries and benefits paid to you and yours. Depending on where that puts your personal tax bracket, it could be a winner. Then there’s the matching contribution of the Social Insecurity Tax & etc. It gets complicated. Plus there are all of these government fees when you incorporate. It’s a hassle. And as for liability, you still need an umbrella policy. Piercing the corporate veil is cake for bounty-hunting attys. My understanding is that trusts are less penetrable. Mostly because the truly rich have been using them to shield their assets for so long there’s a well developed body of case law to support them. Which is one reason why practically nobody makes any real money suing the Kennedys despite all of the contretemps they get involved in.
Well enough of this free seminar. Gotta go make some money…
–CR