What Business Organization is Best for REI
Most real estate investors are looking for reliable tax shelters and ways to maximize their investment profits. In many cases this is achievable through choosing the right business organization through which the real estate investment activity operates. Today we are going to look at several options and present you with the pros and cons of each, so that you can decide what business organization is best for real estate investment in your unique scenario.
The most common business structure many real estate investors use is sole proprietorship. The profits and losses from an investment made through sole proprietorship are reported on the person’s individual tax return and subject to taxation on the tax bracket they fall in, the maximum of which, under the new tax plan is 39.6%. The main benefits from operating as such structure when investing in real estate are:
•No conflicts of interest
•Easier to liquidate the entire estate and not just a fraction of it.
However, there are also downfalls when using this type of business organization. These are:
•The owner is liable for all debts
•The owner may also be liable for personal injury sustained on the property
•The property is a subject to liens for other debts.
Partnerships are another type of business organizations that are commonly used for real estate investment. There are different forms of partnerships that represents different kinds of ownership. One is tenancy-in-common and another is joint tenancy. They both have the same liability and taxation features as a sole proprietorship, however, there are more people involved in the management and therefore, decision-making process.
Tenancy-in-common has at least two people as owners and that affects the share of ownership, as well as the rights of survivorship. The shares in this structure can be unequal and if one of the owners passes away their interest becomes part of their estate. This sort of ownership is often preferred by couples who are not married because it is easily created.
In a joint tenancy, the shares of ownership are equal and the surviving partner owns the whole property.
The main downfalls of these general partnerships are that:
•All partners are liable for the losses
•Their personal assets are exposed to a potential loss cover
•All parties must agree on all management and sales decisions
Limited Partnerships are often classified as the best option for a business organization when it comes to real estate investment. This is because they provide many favourable features on asset protection and taxation. This type of partnerships have at least one general partner and at least one limited partner. Here are the pros in more detail:
•Limited partners have limited liability, they are only liable for debts to the extent of their investment.
•Limited partners are allowed to pass-through the losses of the investment on their individual tax return, offsetting a good amount of income taxes.
•This structure allows the maximum use of depreciation as a tax advantage.
The main negative feature of limited partnerships falls on the general partner, who is often the developer. They need to assume liability for debt of the entire partnership. Read more Protected content
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