Investing in real estate: individual or entity ? 

When considering a real estate investment, one of your first decisions will be whether to purchase the real estate property in your personal name or through a business entity.  Below the options available to you.

Investing in real estate in your personal name

Holding real estate in your personal name is the simplest and least costly option: you do not have to incur fees the year of the purchase -  for setting up the entity -  or the years after – for making the yearly required administrative and tax filings.

To know more about Entity filings:

In addition, personal ownership is most appropriate if financing is needed: banks often prefer setting up a mortgage in the individual’s name rather than in an entity’s name.

To know more about the tax deductions of a real estate activity:

Investing in real estate with a Limited Liability Company (LLC)

The LLC is the  most popular entity type for acquiring real estate. An LLC can be set up with one partner (
single member LLC) or with multiple partners (Partnership).

The LLC offers many advantages. First, the LLC protects the personal liability of its members: in the event of a dispute, a third party can only attack the assets held in the LLC, it cannot reach the assets of individual members.

Second, the LLC is a convenient way to pass on property to family members: for example, in an LLC you can easily transfer assets to other members upon the death of one member.

Finally, for an LLC with multiple foreign members, the sale of real estate will be exempt from the
15% FIRTPA withholding.

To know more about FIRPTA:

Investing in real estate with a corporation

The Corporation is not well suited to hold real estate because the capital gain upon the sale of the property is likely to be heavily taxed.  
First, in the event of the sale of the property, the capital gain will not benefit from the 0% long term capital gain tax rate on the first $80K of the gain.
In addition, any withdrawal by the members following the sale of the property will be subject to double taxation.

As always, the views contained in this article are not tax or legal advice and are not a substitute for consulting with a tax professional.
Karine Bauer, EA is an Enrolled Agent licensed by the Treasury Department with unlimited rights to represent taxpayers before the Internal Revenue Service. She is an experienced tax professional with more than 20 years of international experience.

Bear in mind the date of this article as tax laws change overtime.

Updated June 20th, 2021