Friday, July 21, 2006
How should I purchase and sell real estate? What entity gives the best tax advantage? How can I limit my liability? These are usual questions posed by both beginning and experienced real estate investors. The following are answers to general questions about maximizing profit and limiting liability in real estate investing.
How Should I Take Title?
The first and biggest mistake you could make as an investor is taking title in your possess name. All deeds are community record and free for prying eyes to see. Having property in your own name makes a simple target for tenants, creditors and attorneys. If a liability is formed on your property, the owner (you) are liable. Make sure than you have a barrier zone between you and your properties. Keep your possession private. The simplest, yet the majority effective device for taking title are the land trust ("Illinois Land trusts"). The land trust is shape of revocable, living trust used to take title to real estate. The trust, rather than you, can assume liability for loans. Using a dissimilar trust for each property (e.g., "The 2537 Clarkson Street Trust") allows you to own, direct and transfer property with anonymity.
Keeping a low profile is extremely important for investors who don not require the world to see their business. Land trust agreements are not recorded in any public register so the recipients of the trust are not easily discoverable. The beneficiaries of a land trust could be you, a corporation or some other entity. The trust itself is not considered a divide taxable entity from the beneficiaries (see I.R.C. Sec 671-678). Thus, there are no tax costs of transferring a property into or out of a land trust.
Which is better for Real Estate?
An S corporation is not essentially better than a C corporation, but rather it depends on the investor's exacting tax situation. For example, an investor who has a working spouse might benefit from an S corporation, since a loss from the corporation's operations could be used to equalize the working spouse's income. On the other hand, if an investor has a big profit, she would have income tax on all profits, whether or not they are reinvested or distributed. With a C corporation, the individual shareholder is not taxed on profits until they are dispersed. In most cases, it makes sense to begin out with an S corporation, and then make a second C corporation when the tax returns of a C corporation are viable for you.
What is a Limited Liability Company and how is it dissimilar from a Corporation?
The Limited Liability Company or "LLC" is now documented in all fifty states. People often puzzle an LLC with a corporation, but it is much like more a partnership. Its owners, called "members," could evenly contribute in the management of the company without personal liability.
An LLC, if it has two or more members, is treated as a company for central income tax purposes. Thus, like an "S" corporation, the profits and losses "flow through" to its owners. On hire activities, these profits are not topic to self employment tax (an LLC that engages in "buying and flipping" may not be considered? passive? activity and thus subject the members to self employment tax. Thus, a corporation might be superior to an LLC for this purpose).
What is Best body for doing "Sandwich" Lease/Options?
When you lease with alternative then sublease with option (called a "sandwich"), you are basically doing a "buy and flip" (i.e., when your subtenant exercise, you at the same time exercise from the owner then sell to the subtenant). Thus, a corporation may be better than an LLC in this gaze at, particularly if you do a number of deals and risk being classified as a dealer.
How Should I Take Title?
The first and biggest mistake you could make as an investor is taking title in your possess name. All deeds are community record and free for prying eyes to see. Having property in your own name makes a simple target for tenants, creditors and attorneys. If a liability is formed on your property, the owner (you) are liable. Make sure than you have a barrier zone between you and your properties. Keep your possession private. The simplest, yet the majority effective device for taking title are the land trust ("Illinois Land trusts"). The land trust is shape of revocable, living trust used to take title to real estate. The trust, rather than you, can assume liability for loans. Using a dissimilar trust for each property (e.g., "The 2537 Clarkson Street Trust") allows you to own, direct and transfer property with anonymity.
Keeping a low profile is extremely important for investors who don not require the world to see their business. Land trust agreements are not recorded in any public register so the recipients of the trust are not easily discoverable. The beneficiaries of a land trust could be you, a corporation or some other entity. The trust itself is not considered a divide taxable entity from the beneficiaries (see I.R.C. Sec 671-678). Thus, there are no tax costs of transferring a property into or out of a land trust.
Which is better for Real Estate?
An S corporation is not essentially better than a C corporation, but rather it depends on the investor's exacting tax situation. For example, an investor who has a working spouse might benefit from an S corporation, since a loss from the corporation's operations could be used to equalize the working spouse's income. On the other hand, if an investor has a big profit, she would have income tax on all profits, whether or not they are reinvested or distributed. With a C corporation, the individual shareholder is not taxed on profits until they are dispersed. In most cases, it makes sense to begin out with an S corporation, and then make a second C corporation when the tax returns of a C corporation are viable for you.
What is a Limited Liability Company and how is it dissimilar from a Corporation?
The Limited Liability Company or "LLC" is now documented in all fifty states. People often puzzle an LLC with a corporation, but it is much like more a partnership. Its owners, called "members," could evenly contribute in the management of the company without personal liability.
An LLC, if it has two or more members, is treated as a company for central income tax purposes. Thus, like an "S" corporation, the profits and losses "flow through" to its owners. On hire activities, these profits are not topic to self employment tax (an LLC that engages in "buying and flipping" may not be considered? passive? activity and thus subject the members to self employment tax. Thus, a corporation might be superior to an LLC for this purpose).
What is Best body for doing "Sandwich" Lease/Options?
When you lease with alternative then sublease with option (called a "sandwich"), you are basically doing a "buy and flip" (i.e., when your subtenant exercise, you at the same time exercise from the owner then sell to the subtenant). Thus, a corporation may be better than an LLC in this gaze at, particularly if you do a number of deals and risk being classified as a dealer.
posted by real estate
@ 2:55 AM
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