Real Estate Trust vs LLC (What’s The Difference?)
Among the most common entities are Real Estate Trusts (REITs) and Limited Liability Companies (LLCs). Both provide distinct benefits and drawbacks, shaping the course of your investment journey,.
After months of rigorous research and consulting with real estate experts, I've delved into the intricacies of Real Estate Trusts and LLCs to unravel their crucial distinctions.
With a deep understanding of the real estate industry and a commitment to providing valuable insights, this comprehensive guide aims to clarify the differences between these two popular investment structures.
Quick Summary
- Real Estate Trusts (REITs) provide privacy, while LLCs offer personal liability protection and pass-through taxation
- REITs allow multiple owners and estate planning, while LLCs provide better control and simplified management
- When choosing between a trust and an LLC consider factors like tax implications and flexibility in future goals
Real Estate Trust vs LLC
When considering real estate investments, two common legal vehicles often come into play: Real Estate Trusts and LLCs. Both options serve as effective means of protecting assets, each with distinct advantages and considerations.
Real Estate Trusts
A Real Estate Trust, commonly known as a land trust, is a legal arrangement where a trustee holds title to a property on behalf of the beneficiaries [1]. The trust agreement outlines the rights and responsibilities of each party involved.
One of the primary benefits of a Real Estate Trust is privacy, as the names of the beneficiaries are not publicly disclosed. By shielding ownership details, investors can maintain a level of anonymity in their real estate holdings.
Limited Liability Companies
An LLC is a business entity that offers personal protection to its members while allowing flexibility in management and taxation.
When using an LLC for real estate investments, each property is held under the company's name, separating the investor's personal assets from those of the business.
In case of financial liabilities or legal disputes, the personal assets of the LLC's members are generally protected.
LLC in Real Estate
As an LLC is not a separate business entity, unlike a trust, it does not need to be registered with the court.
However, for tax purposes, an LLC is taxed as if it were one single person or business entity even though there are multiple members in the company.
If you form a real estate investment trust, it will be taxed as a corporation and must file its return [2]. It will pay taxes on any income and gains.
On the other hand, an LLC does not pay federal taxes. Instead, the LLC owners (called LLC members) include their share of net income or loss in their tax returns.
This means that they are taxed at the appropriate individual tax rates up to 35%.
Why Purchase Property as a Real Estate LLC?
There are a few benefits of purchasing property as a real estate LLC.
By forming an LLC, you may be able to:
1. Shield your personal assets from your business assets, hence protecting them from any financial or legal trouble that may arise from the rental property or business dealings
2. Reduce your self-employment taxes
3. Simplify your record-keeping
4. Improve your credit rating
5. Limited Liability or Asset Protection
6. Commercial Properties may allow for larger loans
7. Gain the flexibility to use your LLC for other business interests
The decision to form a trust or LLC for your real estate investments will depend on several factors, including the state in which you reside, the type of entity, and your specific goals.
You can, for example, place your rental property under a Limited Liability Company.
As you can see, there are a few key differences between a trust and an LLC when it comes to real estate investing.
Both have their benefits and disadvantages. It is important to consult with an attorney who can help you make the best decision for your situation.
Trust in Real Estate
A trust is a separate legal entity, which means that it must be registered with the court. For tax purposes, a trust is taxed as a corporation and must file its return, it will pay taxes on any rental income and gains.
Trusts can hold several business assets other than real estate, such as cash, bank accounts, securities, and ownership interests in a limited liability company. Irrevocable trusts are a type of trust that cannot be undone or changed by the person who created it.
This type of trust is often used to protect trust assets from being seized by creditors or to ensure that money will be passed on to heirs in a specific way. Irrevocable trusts can also be used to avoid estate taxes, unlike their revocable trust counterpart.
Why Purchase Property as a Real Estate Trust?
You can purchase property as a real estate trust since it allows for multiple ownership and tax savings. By leveraging a trust structure, investors gain asset protection and risk mitigation, as the property is held separately from personal assets.
This arrangement can also facilitate seamless estate planning and tax advantages.
Here are the detailed benefits you may be able to have:
1. Multiple Owners: A trust allows for multiple owners and beneficiaries. This is useful if you're looking to invest in real estate with your spouse, children, family members, or business partners.
2. Trustee: You can use a trustee to manage the property on your behalf. That means you don't have to worry about dealing with tenants, maintenance, and other management tasks.
3. Estate Planning: A trust can be used for estate planning purposes. This allows you to transfer assets to your beneficiaries and avoid probate.
4. Tax Savings: A trust may offer tax savings advantages that a limited liability company does not. For example, a trust can deduct its administrative expenses from its taxable income. It also is used to avoid taxation in the case where family assets are transformed from one generation to another.
Which One Suits Me Best?
An LLC will suit you best for real estate investments. While real estate trusts may provide certain benefits, an LLC generally provides more control and better protection for individual investors. However, both trusts and LLCs have their benefits and disadvantages.
When it comes to real estate investing, some of the factors you'll want to consider include:
1. Personal liability protection vs. possible tax savings
2. Multiple owners vs. individual tax rates for LLC members
3. Level of involvement in the day-to-day management of a real estate investment
4. The flexibility of future goals
5. State law requirements for both real estate trusts and LLCs. For example, some states only allow real estate to be held in a trust or LLC
Choosing either is based on your specific goals and preferences.
It is recommended that you consult an attorney who can advise you on the best way to set up your real estate investment, depending on your individual needs and state law.
If you still need more assistance always seek legal advice from a trusted law firm.
“The choice between a real estate trust and LLC depends on various factors, including taxation, management structure, and liability protection. It's advisable to consult with a legal professional to determine which option best suits your individual needs.”
- Ben Gold, founder of Recommended Home Buyers
FAQs
Should I Put My LLC in a Trust?
You don't need to put your LLC in a trust. You can own an LLC directly. However, you may want to consider using a trust as the owner of your LLC if you want to protect your personal assets from any lawsuits that may arise from the property or business dealings.
Is It Better to Hold Investment Property in Trust or LLC?
You can hold investment property in trust or LLC depending on your specific goals and the state in which you reside. A Trust may offer potential benefits like anonymity, efficient estate planning, and potential tax advantages. On the other hand, an LLC could provide simplified management.
What Are the Tax Implications for a Trust That Owns an LLC?
The tax implications for a trust that owns an LLC will be taxation as a corporation and will have to file its tax return. An LLC is not taxed directly; instead, the members include their share of net income or loss in their individual tax returns.
Can Multiple Properties Be Included in a Single Real Estate Trust or LLC?
Multiple properties can be included in a single real estate trust or LLC. It can also provide estate tax benefits and streamline asset management for multiple properties under a unified structure.
Trust vs LLC Takeaways
To sum it up, trusts offer more protection for your personal assets than LLCs. Trusts can also provide income tax savings if you plan to run the trust for an extended time (when compared to an LLC).
LLCs offer less protection than trusts, but they allow for "pass-through taxation" just like a sole proprietorship or partnership.
However, both trusts and LLCs can offer tax savings advantages when holding real property.
If you're unsure which choice is best for you, speak with a lawyer or other qualified business person who can assist in starting your own LLC.
References:
- https://www.investopedia.com/terms/l/land-trust.asp
- https://cytonn.com/blog/article/understanding-real-estate-investment-trusts-reits#
