Partnership

If you’re owning rental or business property and there is more than one owner, you can form an LLC or a partnership where the owners hold interests in the entity. Husbands and wives can form a family partnership to own rental property. An annual tax return will need to be filed by the partnership, so this will involve some additional complexity and fees. If an LLC is formed, and properly maintained, the members or owners are protected from liabilities. If a partnership is formed, the entity will need to be a limited partnership under state law in order to provide the investors with liability protection. The trend is for joint owners to form LLCs rather than partnerships since the legal rules for LLCs can be easier to operate.

Direct Ownership

You can purchase property directly in your own name. This is the most straightforward approach, but it may not provide the level of privacy and asset protection you desire. In all cases, insurance is the first line of defense.

Limited Liability Company

An LLC provides transparency for tax purposes, meaning that it is disregarded and treated for tax as though you owned the property directly. However, if you properly form an LLC, liabilities associated with the property should not impact you personally. There are additional costs with the formation of an LLC, and an annual report must be filed annual with the Franchise Tax Board, so this is more costly to set up and maintain than a trust.

Corporation

Corporations are not used to own one’s personal residence. If the property is a rental or business, or commercial office property, one can form corporation to own the property. However, corporations are subject to their initial first level of tax, at 20% of net income, and the remaining income, if distributed, is reported and taxed to the shareholders on their returns. Due to this double tax strategy, and the cost of preparing and filing a corporation, most owners do not use corporations to own real property. Professionals, e.g. lawyers, doctors and accountants, often form S Corporations due to beneficial tax rules. However, S corporations are rarely used to own real estate due to special rules that limited the pass-through losses one can claim on their personal returns.

Family Trust

You can create a family trust to hold the property, which will keep ownership confidential. A trust can include provisions that include succession, and trustee administration in the event you are no longer capable of managing your investments. Ownership by a trust will also avoid expensive probate fees in California for estates over $100,000. In the case of a revocable living trust, one can revise the terms at any time. In general, a revocable trust is disregarded for tax reporting purposes. Typically, a living trust is formed prior to the purchase, so the trust owns the property upon close of escrow. For trusts that are irrevocable, the settlor person funding the trust will not have the same flexibility depending on the terms of the trust. The trust itself is a separate taxable “person” who must file a return if there is income more than $600. There may be front end costs if you engage a professional to draft the trust document.

The comments are intended to provide a general overview of rules regarding different ways to own real property. Whenever choosing the best ownership structure for your real estate investment, it’s essential to consult with a legal and tax professionals to determine the most suitable ownership structure for your individual circumstances and investment goals.