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by Stephen L. Nelson cpa pllc

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Should real estate investors use separate limited liability companies for each property?

Real estate investors often wonder whether they need a single limited liability company or multiple limited liability companies for their properties. In other words, should a real estate investor with multiple properties place all of his or her properties into a single limited liability company? Or should this real estate investor place each property into its own, separate limited liability company.

Fortunately, this question is easy to answer.

If you are a real estate investor who wants to use LLCs to protect your personal assets, you want to put each individual real estate property into a separate limited liability company. If you own several duplexes, for example, each duplex belongs in its own limited liability company.

The reason that you put each individual property into an individual LLC is that if–heaven forbid–something bad does happen, the bad stuff all occurs inside a single limited liability company.

Suppose, for example, that you do own five cute little duplexes, and that you have placed each duplex into its own limited liability company. If the tenant living in the first duplex slips on the steps and is injured, the tenant may be able to sue the LLC that owns that first duplex. In a worst case scenario, the injured tenant may even be able to force that LLC to liquidate and you may lose your investment. But that liquidation should not interfere with or damage your other four limited liability companies or the properties they hold.

One qualification I should make, however. If you and an investment partner (perhaps a spouse?) together own real estate properties through individual limited liability companies, you may want to create a slightly more sophisticated, tiered limited liability company structure. And here’s why: If two people own an LLC, that multiple-member LLC is treated as a partnership for tax accounting purposes. Accordingly, if you with your real estate buddy together own five properties, you guys will have five partnership tax returns to file. Your accountant will love you for this. But you’ll find yourself paying a small fortune in CPA fees.

Note: In community property states, husband and wife limited liability companies can often opt out of partnership tax accounting rules. You may want to consult your tax advisor for more information if this option is available in your state.

As an alternative to the five partnerships for the five properties held in individual LLCs, you may be able to setup a “parent” holding company limited liability company. You and your investor partner (or partners) would own the holding company LLC and the holding company LLC would own the “child” LLCs that own the actual investment properties.

Note: If you’re going to a buy an LLC kit for real estate investing, know that you don’t need the more expensive premium kit… the economy version of the LLC kit for the state where the property will be located is what you want.

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About Stephen L. Nelson CPA, MBA, MS(tax)

Stephen L. Nelson is the managing member of Stephen L. Nelson, CPA, PLLC, a Seattle-area public accounting firm that provides tax accounting services to small businesses and their owners. A CPA for three-plus decades, Nelson holds an MBA in Finance from the University of Washington, an MS in Taxation from Golden Gate University and is the author of dozens best-selling books about accounting and finance including Quicken for Dummies (which sold more than 1,000,000 copies) and QuickBooks for Dummies (which sold more than 500,000 copies). He's also taught business taxation in the graduate tax school at Golden Gate University. For more information, see Nelson's Google+ profile page.

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