Real estate is an excellent investment, especially in Tucson and the surrounding area. It’s a great way to diversify your portfolio and build generational wealth.
If you already own or plan to buy investment property, you are likely a strategic thinker. But here’s an important question to consider – how should you hold the title to that property?
The impact of ownership structure
How you decide to title your investment property, whether it’s in your own name, an LLC or a trust, affects liability, taxes and estate planning. One structure that many investors choose is the Limited Liability Company (LLC). This legal entity provides many advantages for its owners (which are called members), such as:
- Protection from liability: If someone is injured on your property, they can sue the LLC. However, you and your assets are safe from legal action.
- Tax flexibility: An LLC can be taxed as a sole proprietorship, a partnership or a corporation, which gives you more control over how you are taxed.
- Ownership transfers: You can add and remove members from the LLC without the need to change the property deed.
- Professionalism: Using an LLC indicates to tenants and lenders that you are running a legitimate business.
One of the main disadvantages of an LLC is the cost to form it, along with an annual report fee to keep it active. Additionally, many lenders see LLCs as a higher risk than individuals. They may charge higher rates or require personal guarantees for any properties owned by an LLC.
Creating a revocable living trust to hold your investment property is another option. You control the property during your lifetime. After you’re gone, it will be handled by a successor trustee you name. Some people prefer using a trust because it passes directly to your heirs without going through probate. Furthermore, trusts aren’t public records like LLCs, allowing you to maintain privacy regarding your financial affairs.
However, a trust doesn’t offer the liability protection provided by an LLC. If someone is hurt on your rental property, they can sue you personally.
The decision to hold your investment property in an LLC or a trust depends on your primary goal. If you are concerned about protecting your personal assets from lawsuits, then an LLC is your best option. If you are looking to avoid probate and simplify the transfer of property to your heirs, then a trust is the way to go.
A third option that many investors use is a hybrid approach that provides both liability and estate protection – the investment property is placed in an LLC owned by a trust.
Before deciding on your investment property, you need to speak with a legal professional. They can explain your options and help you with creating the right structure that protects your assets and secures your legacy.
