A trust is a legal entity created to hold business assets for beneficiaries. Therefore, if you create a trust and deposit money in it, the bank will register your funds as belonging to the trust.
A trust could be set up for business purposes - such as holding your real estate investments.
In this sense, a trust might serve a similar function to a limited liability company (LLC).
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.
Tax Treatment of Trusts and LLCs: If you form a real estate investment trust, it will be taxed as a corporation and must file its return. It will pay taxes on any income and gains.
On the other hand, an LLC does not pay federal taxes itself. Instead, the LLC owners (called members) include their share of net income or loss in their tax returns; which 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 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 or even an investment property under a Limited Liability Company or it is important to consult with an attorney who can help you make the best decision for your situation.
As you can see, there are a few key differences between a trust and 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 income and gains.
On the other hand, Limited Liability Companies do not pay federal taxes themselves; instead, the LLC owners (called members) include their share of net income or loss in their tax returns; which means that they are taxed at the appropriate individual tax rates up to 35%.
Trusts can hold serval assets other than real estate, such as cash, bank accounts, securities, and ownership interests in an LLC. 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 the trust’s 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.
Why Purchase Property as a Real Estate Trust?
There are a few reasons for purchasing property as a real estate trust. By forming a trust, you may be able to have:
- 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.
- 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.
- Estate Planning: A trust can be used for estate planning purposes. This allows you to transfer assets to your beneficiaries without having to go through the probate process.
- Tax Savings: A trust may offer tax savings advantages that an LLC 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?
There are some key distinctions between trusts and LLCs, which are worth taking into account if you're thinking of setting up either entity.
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.) 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 preference.
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.
Read More: Move an LLC to Another State
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?
There is no one-size-fits-all answer to this question. It depends on your specific goals and the state in which you reside.
You should speak to an attorney to get advice tailored to your situation.
What Are the Tax Implications for a Trust That Owns an LLC?
A trust that owns an LLC will be taxed 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.
Trust vs LLC: Conclusion
To sum it up, trusts offer more liability protection on 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).
For example, trusts do not have "double taxation" like corporations because they are not taxed as a separate entity; instead, all income is reported on the individual's tax return.
The main disadvantage of trusts is that there are more forms to file with the state and federal governments, which can make it difficult to establish trust at times.
LLCs offer less liability protection than trusts, but they allow for "pass-through taxation" just like a sole proprietorship or partnership.
This means that all income or losses are included on the LLC members' personal income tax returns.
The main disadvantage of an LLC is that it limits an individual's estate and gift tax planning opportunities (although there are some exceptions).
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 you in forming an LLC.