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Entity Ownership Of Real Estate
By Jeff Riddell
Last article we talked about how individuals can own real estate. Now let’s turn our attention to ownership in an entity. Let’s look at a few.
We’ll start with corporations. You probably know that corporations—other than some federal corporations like banks—are formed under state law. Although corporations are great for businesses, corporate ownership of real estate is generally not favored regardless of whether the corporation has elected to be taxed as an “S Corporation” or a “C Corporation.” Double taxation—both corporate and shareholder level—can be one problem (at least in a C Corporation), but worse yet, C Corporations do not enjoy preferential long term capital gains tax rates. To add insult to injury, when there are multiple shareholders in a real estate corporation, they cannot go their separate ways when the property is sold; some cashing out and paying their capital gains tax while others complete 1031 exchanges. Nevertheless, corporations do create the liability shield that people want from entity ownership of real estate.
How about a partnership? There are general partnerships and limited partnerships. In general partnerships, usually everyone has equal status, power and liability. By contrast, in limited partnerships, there are one or more general partners and one or more limited partners; and the general partners and limited partners have different status, power and liability—the general partners run the show and the limited partners are along for the ride.
Whether the entity is a general partnership or limited partnership, partnership taxation principles apply. Both partnership and limited partnership have often been the entities of choice for investment real estate owned by more than one person, but all partners in a general partnership—and general partners in a limited partnership—have unlimited personal liability, so exercise caution if you are considering participation in a real estate venture as a partner other than as a limited partner.
The better mousetrap came in the form of limited liability companies. Starting in the 1980s, states began passing legislation authorizing this new legal entity which is usually referred to as an LLC. Although the owners of corporations are referred to as shareholders and the owners of partnerships are referred to as partners (both limited and general partners in the case of limited partnerships), LLC owners are called members. The LLC concept was an offshoot of partnerships—but with limited liability for the partners—so states initially required more than one member. As LLCs evolved, states changed their laws to allow single member LLCs and IRS decided to allow an LLC to elect how to be treated for tax purposes; the choice came in the form of the “check the box” regulations. Tax treatment of LLCs can run the gamut from disregarded entity (for single member LLCs), partnership status (for multiple member LLCs) and even corporate status (C Corp or S Corp). No matter what tax status an LLC chooses, the LLC provides the liability shield most investors want.
There are a few other entities such as Massachusetts business trust, Illinois land trust and Delaware statutory trust that are sometimes chosen to hold title to real estate. Although these bear the names of the states where the type of trust originated, most other states now allow them—or have similar versions of them. Where such trusts are used for real estate ownership, title is held by a trustee for the benefit of the trust’s beneficiaries.
Jefferson F. Riddell is a Florida Board Certified Real Estate attorney with thirty-five years of experience assisting people with a variety of residential and commercial real estate matters. U.S. 1031 Exchange Services, Inc is a 1031 exchange qualified intermediary (QI) and a member of the Federation of Exchange Accommodators (FEA). As President of U.S. 1031 Exchange services Jeff has been facilitating 1031 exchanges for more than twenty years. Jeff has been awarded the Certified Exchange Specialist (CES) certification. Jeff may be reached at 941-366-1300 or via email at jeff@us1031.com [2]. www.us1031.com [3].
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