Homeownership is personal.
There’s the excitement of getting the keys at closing. A sense of pride when you see your name on the deed of your first home or hang the family name on the front door.
Because of these moments, it makes sense that most investors assume they, as individuals, should be the legal owners of their properties. But what if there was another investment structure that provided you major advantages to advancing your wealth? And what if it gave you the opportunity to unlock financial freedom?
How is this possible? Putting your real estate assets in a limited liability company (LLC) could supercharge your investment capabilities. Of course, LLCs might not be for everyone—always consult your lawyer and financial advisor. But go to that meeting well-informed.
Today, we here at Passive Income MD want to provide you with a little bit of a business education. Specifically, we’ll explore this question: Should you own your rental properties under an LLC?
How could you benefit? Does the upside outweigh the downside? Start your LLC education by considering these three major advantages to owning real estate through an LLC.
Saving Money on Taxes
Benjamin Franklin famously said that “nothing is certain except death and taxes.” Perhaps the only thing more certain is the idea that taxes are boring. Yet, I often find myself chatting with medical colleagues about tax-advantaged financial strategies. Let’s face it: Taxes matter to doctors.
So this will pique your interest: Investing in real estate under an LLC will save you money on taxes. To do this you’ll need to opt into pass-through taxation, meaning profits and losses can be counted on your personal tax return instead of your business tax return.
It seems counterintuitive to increase your personal tax burden, so how can pass-through taxes be a good thing? Quite simply, pass-through taxation gives you a 20% deduction on passed-through business income.
Let’s crunch some numbers to explain what that means. Say that you earn a $100,000 salary in medical income and $75,000 in passive rental income through an LLC. After accounting for your other deductions, you’d be in the 24% tax bracket. By passing the income through the LLC to your personal taxes, you can deduct $15,000—20% of your rental income. Because you’re in the 24% bracket, you’d save $3,600 from your taxes this year—all because your assets were in an LLC you own instead of directly in your name.
Accidents happen. It’s inevitable. Can your personal finances afford a lawsuit? Somebody might slip and fall on your property or come after you for perceived maintenance issues. Liability is one of many common fears that prevent physicians from investing in real estate.
But there’s a simple solution. Placing your real estate investments in an LLC can protect you from personal liability in the event of a lawsuit. Because you are separate from your LLC, you will be walled off, so to speak. In most cases (but not all), claimants couldn’t gain access to your personal assets, just the assets of the LLC (which is why it can be advantageous to set up several LLCs).
This protection also extends to debt. If debt accrues under your LLC, depending on the situation, a barrier between your LLC and personal wealth will keep your finances intact.
Wall off your liability as much as possible so that accidents don’t impact your personal and diversified streams of income.
Retain Legal Anonymity
There was a point in time when doctors took pride in displaying “MD” license plates on their cars. Not only did it cover us if we sped down the highway for an emergency, it also signaled our calling. As time went on, MD plates opened up doctors to unnecessary risks. Get into a minor fender bender with a physician, and all of a sudden people feel more litigious. These days, the MD plates have all but disappeared.
Likewise, when you’re a high-income professional, it’s less-than-ideal for your name to be on the deed. Although accidents and lawsuits can be a normal part of real estate investing, keeping your name off the deed will reduce frivolous claimants who see going after a doctor as an opportunity.
Moreover, leading with your business name will make you a professional in the eyes of potential renters. Overall, tenants feel more comfortable knowing they are renting from a business—it brings a heightened sense that they will be taken care of by professionals.
LLCs—Your Continuing Education
With many advantages, LLCs are not without their flaws. It’s best to work with your team of professionals to find out what’s right for your situation.
You may find that state laws, which can vary, may not allow LLCs to protect against personal liability. Many states also have a transfer tax if you are moving real estate assets you already own to an LLC.
Further, if you’re planning to transfer your properties to your LLC, check with your mortgage company if your note includes a Due on Sale Clause. Many do. They stipulate that, if you initiate a transfer, the lender can call your loan, and that can come as an unwelcome surprise if you are not prepared.
There’s no one-size-fits-all approach to LLCs. Continue your education by working with your team and by joining one of Passive Income MD’s many communities, all of which focus on unlocking financial freedom through passive income streams like real estate. Sign up for our newsletter for regular guidance and conversation. You can also attend one of our many conferences or events, such as the Physician Real Estate & Entrepreneurship Conference. Or you could sign-up to be part of the Passive Real Estate Academy (PREA), a networking community of thousands that only opens its doors a few times a year.
Regardless of where, we here at Passive Income MD hope to see you staying engaged and pursuing your financial goals by continuing to educate yourself about the possibilities of passive income.
Join our community at Passive Income Doc Facebook Group. And let us know in the comments below the freedoms you are excited to pursue.