Real estate investments – entity selection

Clients should realize pros and cons of the entity they form for their business or investment activity.

  • S corporation?
  • How about an LLC?
  • When planning to purchase several single-family homes … should I form a C corporation?

Answering the question of entity choice is best before transactions are initiated, but remain a valid question at any point. There are issues like income taxes, legal protection, partners, ease of doing business, insurable risk, and access to credit. Cash flow preferences, (now or later),  along with the right entity can even slash your tax burden while providing legal protection against creditors and lawsuits.  The right entity could affect your ability to deduct 100% of your medical expenses,  and save income and self-employment tax.


Choice of Entity Considerations for Real Estate Investors …
Choice Of Entity Considerations For Real Estate Investors. One of the most difficult choices for investors in real estate, either new or seasoned, is determining …
 Choosing the right business entity for your investment real estate is an important decision with many consequences. It is crucial to work …
Sep 12, 2012 – If your business is holding real estate, go with a pass-through entity, …. of the owners, the entity choice for your business is no small decision.
advises real estate funds, private equity funds, hedge funds, limited liability … considerations such as real estate investment trusts and tax-exempt entities.

Choice of Entity in Real Estate Transactions. (With Emphasis On Partnerships. And Limited Liability Companies). Tab le of C onten ts. Page. I. SCOPE OF …

(Speak to your accountant/ lawyer/ lender/ and insurance agent for specific advise – the following is excerpts from counsel received and not to take the place of paid advisers in their respective field of licensing.)


No tax on sale of home ? Rules and exceptions

Well here’s some interesting perks for home sellers looking for tax breaks. No tax on up to $500k MFJ if owned over 2yrs – most of us knew that one, but did you also know:NW$ign

There are several exceptions. Under the old rules, if the home has been held fewer than two years, and if the move is job-related or health-related or there were other unforeseen circumstances, the taxpayer was allowed a prorated portion of the exclusion. The IRS ruled that unforeseen circumstances could include:

  • divorce, legal separation, or death of a spouse;
  • becoming eligible for unemployment compensation;
  • a change in employment that makes it impossible to pay the mortgage or basic living expenses;
  • multiple births resulting from the same pregnancy;
  • damage to the home from a natural disaster, act of war, or terrorism; and
  • condemnation, seizure, or involuntary conversion of the property, such as foreclosure.

Passing title at death

The dad signed a deed giving property to the child, left it in his desk assuming child would find it after death.

Deed was

  1. Never delivered
  2. Never accepted
  3. Never recorded (aka perfected) although not a requirement but a good idea
  4. and is now subject to probate without a will to pass the property

Deeds undelivered until after death in Michigan do not survive death.

Lesson: See the lawyer now.

Leaving your house to the children

particularly the part:
“….Joint Tenancy:……Another problem with owning property in joint tenancy is that when you add a co-owner to
the property as a joint tenant, you lose many aspects of property control. Many parents think that by
adding their son’s or daughter’s name to the property that it is a way to pass the property on without
a probate and this is generally true, but …...bla bla……. You also
expose the property to your co-owner’s debts and obligations, so by adding your son’s or daughter’s
name to the property, you could potentially lose your home to your child’s creditors if he or she is
successfully sued. There could also be gift and/or income tax problems if your co-owner is not your
…….bla bla bla…..
Finally, property held in joint tenancy only receives a step up in the basis equal to one-half of
the property value at the death of the first joint tenant.

Paul’s notes:
Easiest tax wise, the spouse owns with spouse….property willed to child(ren). Child(ren) get full stepped up basis to reduce tax burden on them. Parents get ease of mind not having to worry about child being sued and attachment to parents property.

I’ve seen children added to deeds prior to passing of parent(s). Sometimes this is great, but I saw a real estate agent give advise she wasn’t at all qualified to give & it created an immense hardship ($15ooo tax bill) that could have been avoided with a 5 minute call to myself.
This should involve legal AND taxation planning – if not insurable risk as well – consultation.

End of year tax planning for real estate investors / landlords

Landlord / investors, are you using component depreciation as an option IntegrationCapin your year to year tax planning ? If income will remain flat or decline, you may wish to ‘pull’ your deductions back with various planning techniques.

Another quick tip, you can increase your ROI by 4+% just by using a different entity to hold your investments. 

Real estate evaluation tools & primer

Here’s a nice little primer on evaluating real estate investment options.…/introduction-to-real-estat…/ Clients, if you’d like some fillable templates to automate calculations in the article, let me know.

Looking for a primer on real estate analysis? Learn about Pro-Formas, Cap Rates, NOI, Cash-on-Cash Return and Total Return in this thorough tutorial.