Should I set up a holdings company to invest in rental properties?

Chances are, if you’re building your rental property portfolio, you’ve probably begun questioning whether or not you need to start a holding company. Creating a holding company can bring a number of benefits, including advantages with tax, liability, and increasing the value of your current real estate portfolio. 

Forming a holding company for real estate is the most popular business structure for rental properties, but to really determine if whether forming an LLC is the best route for you, it’s important to understand what it is and how it works first.

What is a holding company?

A holding company is a parent corporation, limited liability company (LLC), or limited partnership (LP) that owns enough voting stock in another company to control that company’s policies and oversee its management decisions. Although a holding company owns the assets of other companies, it merely maintains oversight capacities and therefore does not actively participate in running a business’s day-to-day operations. Businesses that are 100% owned by a holding company are referred to as “wholly-owned subsidiaries.”

Given the ownership structure, holding companies enjoy the benefit of protection from losses. If a subsidiary company goes bankrupt, the holding company may experience a capital loss and a decline in net worth — but the bankrupt company’s creditors cannot legally pursue the holding company for remuneration.

It’s a way to reduce risk and liability when it comes to investing in property. The financing, deed, and contract are under the name of the holding company, not you as the individual investor. In this article, we’ll refer to one of the most popular forms of holding companies: the LLC.

What is the purpose of an LLC?

An LLC is meant to protect the liabilities that stem from your business. When an LLC is used for rental properties, the owner receives the protection of their personal assets through the use of a business entity but is still allowed to claim the income on their tax return.

Here’s an example:

John invests in a rental property, and his tenant later falls down the stairs and decides to sue him. His tenant could potentially come after his personal assets via a personal injury lawsuit. Or maybe John’s tenant disagrees about the agreed-upon terms of returning their security deposit. The tenant could decide to settle it in court, putting John’s personal assets on the line. With an LLC, however, the only assets in jeopardy are those owned by the LLC. This means John’s home, car, bank account, and other assets aren’t in danger if a tenant decides to sue.

There are many reasons beyond tenant-owner liability situations why working through an LLC is great for real estate investing purposes.

The Tax Implications

Acquiring property through an LLC allows investors to avoid double taxation because any income that the property earns goes directly to the owner, who is only required to pay taxes as an individual while receiving the protections that come with an LLC. Using an LLC for real estate is also beneficial because both the rental income and the appreciation value are exempt from taxes.

Transferring Ownership

Using the LLC as a business structure for your rental properties, you can transfer the shares (through inheritance or as a gift) without having to get a new deed. This means less work on your part, minimizing the required paperwork and fees required in a traditional real estate transfer.

Creating a holding company has its benefits, but it’s important to meet with your own legal professional to get the full picture when it comes to setting an LLC up. Because real estate investors reap so much tax and liability benefits from LLCs, they’ve become the most popular entity for real estate investors in the USA.  

 

 

 

*Legal Disclaimer: The information in this article is solely based on our experience and personal opinions. The statements in this article are not forms of legal advice, and if you need clarification about how this will work for you in your particular situation, we recommend speaking to an attorney or an accountant.*