LLC Rules & Regulations for Real Estate Investments

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A limited liability company is a simple form of business incorporation that can be used to give individuals or groups of investors a way to protect their personal assets while buying investments. With the LLC serving as owner, the individual members of the LLC can’t be held personally liable for any damage or injury that occurs on the investment property. Investors can also use LLCs to buy and hold real estate as part of an individual retirement account investment.

Filing Fees and Documentation

Forming an LLC requires a filing fee, in addition to annual renewal fees, which will vary depending upon the state where it is registered. Most states require articles of incorporation as part of the LLC’s documentation. The articles of organization designate the LLC’s official name and the registered agent, an in-state resident who serves as the LLC’s representative. The LLC’s statement of purpose, management structure, address and duration are other information that may need to be included on the articles of organization. While it is not required by state law, it is considered good business practice to write an operating agreement for the LLC that states the rights and responsibilities of each member.

Liability Protection

An LLC protects its members' personal assets from potential lawsuits by limiting the personal liability of members to their investment in the LLC. However, any LLC must still meet requirements for management of the property, such as keeping it safe and up to environmental standards and sanitary codes. Any negligence by LLC members could result in the loss of liability protections. For instance, if the LLC didn't repair a damaged building and someone was injured, the members could be sued for personal assets, including their bank accounts, vehicles and homes.

LLC Taxes

LLCs are classified as “pass through” entities, and this arrangement allows members to pay the taxes on LLC profits through their own personal income tax filings. This lets LLC members avoid corporate taxes, which can result in double taxation on capital gains taxes on the LLC's real estate investments. LLC members are still subject to all the Internal Revenue Service tax rules that apply to individual investors who profit from real estate investments, including capital gains taxes. If the property was owned less than one year, the profit is considered income and taxed at your individual tax rate. If it is owned for more than one year, the profits on its sale can be classified as a capital gain, and it's taxed at a lower rate.

Self-Directed IRA LLCs

Sometimes investors form LLCs to operate self-directed IRA accounts that permit real estate ownership. These are different from traditional IRA accounts that are mostly limited to stocks, mutual funds and bonds. Self-directed IRAs are operated by legally recognized custodians, through whom investors can purchase and manage real estate as part of a retirement investment portfolio. Profits made on real estate investments aren’t subject to tax until the account holder begins withdrawals at the retirement age of 59 ½. Early withdrawals are subject to a 10 percent penalty fee in addition to federal and state taxes.


About the Author

Terry Lane has been a journalist and writer since 1997. He has both covered, and worked for, members of Congress and has helped legislators and executives publish op-eds in the “Wall Street Journal,” “National Journal” and “Politico." He earned a Bachelor of Science in journalism from the University of Florida.

Photo Credits

  • Ryan McVay/Photodisc/Getty Images