Holding Title to Investment Property in a LLC
Investors in real estate throughout Greater Boston have seen their property values increase dramatically over the past few years. Most real estate investors would agree that one of their major concerns regarding investment property is to limit their personal liability from such investment property and not have their personal assets subject to creditor claims. A limited liability company (LLC), a relatively new entity in Massachusetts, provides investors with limited liability like that of a corporation and the ability to have pass through tax treatment like that of a partnership. It is these characteristics which make the LLC an attractive entity for holding investment real estate.
An LLC is a separate legal entity and a creature of state law. Unlike a general partnership where all the general partners have personal liability, or a limited partnership where the general partner, and those limited partners who actively participate in the management of the limited partnership, are personally liable, none of the members of an LLC have personal liability. As such, if someone is injured on your investment property and sues you, if the property is owned in a LLC, your personal assets will not be subject to the lawsuit.
LLC’s are designed to take advantage of the partnership statutes that provide a judgment creditor with only the rights of an assignee of the partnership interest. Massachusetts law provides that if a creditor obtains a judgment against an LLC and a court order to attach the LLC assets, the creditor is not entitled to take ownership in the LLC, but rather, the creditor merely receives a charging order. A charging order under Massachusetts law against an LLC is not worth much. The creditor receives only the debtor’s share of income of the LLC, but the creditor has no legally enforceable right to compel the LLC to make distributions. As a result, the creditor may be taxed on income from LLC distributions that he never receives (this is known as phantom income). These factors cause a creditor to be dissuaded from attaching an interest in a LLC.
There is a $500.00 organization fee for an LLC and a $500.00 fee for filing required annual reports. Although this may seem somewhat expensive, the protection from potential liability exposure is well worth the money.
Besides shielding your personal assets from creditors, other reasons for owning investment property in a LLC include estate tax planning purposes; and the ease of transferring ownership without recording such transfers
Other commonly used entities such as nominee trusts and partnerships do not offer the same protection of personal assets as LLC’s. Although there are some forms of ownership which provide some asset protection such as tenants by the entirety (which is available only to married individuals), limited liability companies are becoming the new entity of choice for owners of investment property.