Deciding what legal entity in which you buy and hold your real estate is important. You should consult with your financial and tax advisors along with your New York real estate attorney to figure out the right legal entity. You should consider, among other things, the type of investment property (undeveloped land, commercial real estate, multi-family building, coop, condo, townhouse, mixed use, garage structures, among other real property types), the amount of equity and debt at stake, revenue projections and other matters like management of the property itself.
Generally, a Limited Liability company (an LLC), is the proper entity to hold investment real estate.
- Like a corporation, the members’ liability is limited to their capital investment (absent any contractual personal guaranties). Structured properly, liability incurred on one property will not impact other real estate that is owned. Depending on the buyer’s tax structure, even coops (in some circumstances and depending on the building) can be purchased using a LLC (or a trust or other special purpose investment vehicle).
- An LLC can elect to be taxed as a partnership — with the profit and loss of the investment passed through to the members’ individual tax returns.
- An LLC has less legal formalities than other corporate structures. See my article, “Why Choose a Limited Liability Company (LLC) over a Corporation For Your Small Business?“
- There are numerous advantages in using an LLC for Section 1031 tax deferred exchanges and for estate planning. For instance, if properly structured, the value of a gifted LLC membership interest could be done at discount (e.g., a controlling interest has greater intrinsic value over a minority interest).
You should consider hiring a New York real estate lawyer early in the process. He or she will work closely with your tax and financial advisors to help structure your investment real estate holdings in the best way possible and can guide you through the real estate buying process by preparing and negotiating the real estate broker agreement, drafting the contract of sale, negotiating lender agreements (notes and mortgages), IRS Section 1031 exchange planning, among other things.