Real Property Ownership in an LLC

SARASOTA, Fla. - May 31, 2013 - PRLog -- Many Florida real estate investors, or individuals seeking to purchase homes, have likely heard about the growing trend of taking ownership of real property in a Limited Liability Company (LLC).

Owning real property in an LLC has many benefits due to the legal liability protections afforded its owners, as well as the asset protection it provides owners from their personal creditors, subject to certain exceptions described below.  By contrast, individual ownership of real estate permits creditors the ability to lien the real estate pursuant to valid legal claims against the individual owner.

If seeking to purchase real estate in the name of an LLC, the additional expenses required to form, maintain, and organize the LLC should be considered.  Florida requires initial organization filing and renewal fees each year.  An operating agreement which dictates the management and structure of the LLC is also advisable and should be prepared by an attorney.

Also, the attractive asset protection benefit of an LLC, described above, is subject to certain limitations due to a 2010 Florida Supreme Court Case, Olmstead v. Federal Trade Commission.  Prior to the Olmstead ruling, creditors of an LLC’s individual owner(s) were limited to a lien on any distributions of cash made by the LLC to the particular owner, and prevented access to the assets of the LLC, such as real estate.  Following Olmstead, however, in the case of a single member LLC, the single member/owner may be ordered to surrender all right, title, and interest in the LLC, as well as the LLC’s assets, to satisfy a judgment held by the owner’s creditor.

Further, foreign real estate investors should be aware of certain Internal Revenue Service (IRS) withholding requirements, commonly referred to as FIRPTA (Foreign Investment in Real Property Tax Act of 1980) income tax withholding.  FIRPTA authorized the U.S. to tax foreign persons on dispositions of U.S. real property interests.  The requisite FIRPTA withholding is made at the time of sale, subject to certain exemptions, and is typically withheld from the sale proceeds.  A common misconception is that FIRPTA withholding obligations can be circumvented by holding property in the name of an LLC or other business entity.  However, the FIRPTA withholding obligations also apply to the sale of real property by a foreign owned domestic business entity.

Many commercial lenders favor LLCs for the above described reasons and may require that their borrowers take ownership in the name of an LLC to mitigate potential future liability with respect to the real estate and/or the LLC owners.  However, if taking title to real estate in an LLC and obtaining a commercial loan, the down payment and/or interest rate required may be larger than what would otherwise be required from a non-commercial lender for the purchase of real estate by an individual.  To that dilemma many ask- why not just take title as an individual and thereafter transfer title to my LLC?  Most lenders include language in the loan documentation preventing this practice and provide that upon the sale or transfer of title of the real property, the lender has a right to accelerate the loan and demand repayment in full.

The best manner in which to purchase real property is dependent upon a number of factors, which vary with each buyer.  Consideration of the above, as well as tax considerations, should be discussed with an attorney (http://koontzassociates.com/index.aspx?TypeContent=CONTACTUS) to achieve the optimal protection of your investment.

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Jo Ann Koontz is an attorney and CPA practicing in the areas of real estate, business law and taxation. She can be reached at (941) 225-2615 or joann@koontzassociates.com.