Holding Property

Ways to Hold Property

The different ways of holding investment property each have their benefits and drawbacks. Books are written on this subject, and my overview may be helpful, but is not intended to be definitive.

Individually
Property can be held in your individual name. One of the drawbacks is liability. If a judgment is entered against you, many of your assets will be subject to execution and attachment.

Limited Liability Company
Limited liability companies (LLCs) are commonly used to hold title to real property.  LLCs can be owned by one or more members. If a judgment is entered against the LLC, the creditor may be unable to force the LLC to distribute its assets for the benefit of the creditor. Lawyers are crafty, so they may name you personally as well, thereby defeating the liability protection. And, if you’re in a high risk profession, such as a medicine or property management, a successful suit against you may result in the loss of some of your assets. Nevertheless, a lot of properties are owned by LLCs.

Corporations
Real property can be titled in corporations. A corporation may elect to be an “S” corporation or a “C” corporation for tax purposes. There are advantages and disadvantages to being either an “S” corporation or a “C” corporation. Because of certain tax rules that apply to corporations, many people elect not to use corporations to hold real estate.

Family Limited Partnerships
Family limited partnerships (FLPs) are popular for estate planning. The parent keeps a controlling interest in the partnership and the children get a discounted limited partnership interest.

General Partnership/Limited Partnership
General and limited partnerships are popular in syndication deals. A general partner puts together a deal, such as a strip-mall, and controls it. The GP finds investors, the limited partners, who put up the money, but have no control. Limited partners’ losses may be limited to the extent of their investment. It’s a good idea to know and trust your GP in these arrangements.

Joint Venture
A joint venture (JV) is an association of persons or entities jointly undertaking some commercial enterprise. There are reasons to use a joint venture, such as when one person’s LLC and your LLC want to do a project together.

Living Trust
These are popular with the estate planning lawyers. An advantage of inter vivos or living trusts is the avoidance of probate.