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This article provides a quick summary of the best entities for real estate investment. There are three types of entities most commonly used to own real estate: Limited Liability Company, S Corporation and Limited Partnership. 1. Limited Liability Company for Long Term Investors The Limited Liability Company (known as LLC) is the best entity for most real estate and mortgage investors who "buy and hold" their investments. When you buy and hold real estate it is considered a capital asset. The primary goal for "buy and hold" investors is to achieve rental income and long term capital appreciation. To achieve privacy, the LLC should be formed in Delaware. In most states, including Florida, the ownership of real estate does not constitute the transaction of business. For that reason, a Delaware LLC formed for the sole purpose of owning real estate is not required to register as a foreign LLC in the state where the real estate is located. 2. S Corporation for Short Term Investors Some real estate investors engage in a business practice commonly called flipping real estate. This means the investors "buy and sell" real estate with the goal of turning a quick profit. When real estate is flipped it is considered inventory and the investor is considered a "dealer." A real estate dealer cannot take advantage of the following tax benefits that are available to buy and hold real estate investors: *
Capital gain tax rate Real estate investors who flip real estate should form an S corporation (or LLC taxable as an S corporation). This allows the dealer to avoid self-employment/social security tax on a portion of the profit earned from flipping real estate. 3. Limited Partnership for $10+ Million Property You can avoid the Florida intangible tax by forming a limited partnership (known as Ltd. in Florida) to buy real estate. An ownership interest in a limited partnership is exempt from the Florida intangible tax. As of 2003, the Florida intangible tax is calculated by this formula: Annual Florida Intangible Tax = .001 x Value of Intangible Asset An ownership interest in an entity is considered an intangible asset. An ownership interest in a limited partnership, however, is exempt from the Florida intangible tax. Since a limited partnership can be very expensive to form, this type of entity is most often used to buy real estate with a purchase price of $10 million or more, assuming an 80% loan to value ratio. With that loan to value ratio, the equity value is $2 million. (This article ignores the valuation discounts that may apply to limited partners.) Since the ownership interest in a limited partnership is exempt from the Florida intangible tax, the partners would avoid the $2,000 intangible tax that would be owed if the same real estate were owned instead through an LLC or S corporation. If you form a limited partnership, it is important that you form a separate entity to be the general partner. 4.
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