5 Financially Smart Reasons to Set Up A Real Estate Holding Company
The value of properties continues to rise every year even though more homes are continually being built. But The more properties you own, the more you expose yourself to the risk of losses and liabilities.
If you’re interested in buying multiple properties whether for a business or to sell then a real estate holding company is definitely your best option.
It not only is able to offer certain protections for you legally, but it also gives you options to adjust your taxes to be more advantageous.
Read on to see how a holding company not only makes things easier but is financially smarter too.
1. You Reduce Your Risk
If you don’t have a real estate holding company then your personal wealth can be targeted and you may end up losing assets to pay for damages. But if your properties are owned by a company you set up, then the liability falls to the company.
In this situation, creditors are authorized to target the company’s accounts and assets such as the properties under it. Any personal assets belonging to the owners such as their cars, homes, and bank accounts are exempt.
This is because any properties you purchase and own will be held in the company’s name with the company being the legal owner of the deed.
You equally can apply for mortgages and funding through the company as well meaning the legal liabilities fall on the company as well.
2. You Can be Protected
There are numerous ways to set up a real estate business but the most common by far is a limited liability company or LLC.
This is because LLCs and their owners receive certain protections to help offset issues that may arise.
For example, if you are running a business through a property you own, it could be advantageous to list the property and the business separately under different holding companies.
This is because if something happens on the property and the victim chooses to sue, they can only go after the company the property is listed under. This, in turn, protects the business’ assets and accounts.
3. It Still Counts as Personal Income
Despite being regarded as separate entities, you are fully able to claim income from the real estate holding company on your own tax returns.
This is because LLC’s are not seen as a corporation which is a separate tax entity. Instead, all income and losses are passed through on to the members of the LLC. For these reasons LLC’s do not pay federal income taxes but may be subject to annual fees depending on the state you live in.
Of course, you and any members will be expected to pay income tax from your profits and this does include the money that you keep in the business for reinvesting.
However, the more of the profit you spend, the less you’ll receive as income and therefore the less you’d have to pay in taxes.
Usually, in member LLCs, there is a ranking system which determines who is entitled to what share of the profits. No matter who actually ends up receiving the money, each person will be liable to pay income tax based on their share.
4. Your Real Estate Holding Company Can Include Your Family
The best part about LLCs is that you don’t have to find external partners for a multi-member business. Instead, it’s perfectly acceptable and normal to bring family members into this process to allow you to make the most out of the profits and distribute them easily.
This practice is adopted by many of the world’s wealthiest individuals such as the owner of Walmart or people like Bill Gates.
In their situations, the majority of their wealth is tied up in LLCs including investments and stocks.
Because Walmart is all over the country and Microsoft is all over the world, it’s easy to see the advantages of keeping themselves personally protected through the LLCs.
Including family members is a great way to ensure assets and wealth are passed on without your personal assets being factored into the equation.
5. Enjoy Tax Benefits
Knowing that you need to pay tax on all income gained through the LLC may seem daunting, but there are steps you can take that help to mediate this.
It starts by creating a Subchapter “S” Election which essentially deems your LLC as a small business. This gives you the advantages of an LLC as well as tax rate enjoyed by individual shareholders.
Specifically, the share of profits that would be attributed to owners’ personal income is reduced by the amount they pay themselves as employees. What this means is that some of the taxes are paid while the rest is withheld. Even though that means your company then pays half of the tax, the total amount will be lower.
Use Professional Help
Setting up a real estate holding company can be both daunting and confusing when it comes to the taxes and legal frameworks.
Involving the help of a professional not only ensures you are getting the maximum gains and protections the company provides but also gives you peace of mind for the years ahead.
It’s always recommended that people new to this process hire a professional because it allows them to sort out all their finances and assets.
You may be surprised at how many things you were doing wrong or didn’t know so be sure to at least bring someone in when setting things up initially.