There are many types of entities that can be used to hold real estate, each with its own advantages and disadvantages. The common types are:
The simplest ownership structure is to own real estate personally. This minimizes administrative costs; however, it does not offer any liability protection and offers little flexibility for tax planning.
A corporation is a separate legal entity from the shareholders, and any income earned is taxed within the corporation. The after-tax income of the corporation would then be paid to the shareholders as dividends. A corporation can be advantageous as it provides liability protection to the shareholders and can allow for certain tax planning strategies.
A partnership exists when at least two persons carry on business with a view to profit. Partnerships are flow-through entities for tax purposes. They are not considered separate taxable entities, so all income and/or losses are taxed in the hands of the partners. Depending on the type of partnership, a partnership may or may not offer some liability protection to the partners.
Similar to a partnership, a joint venture is a flow-through entity for tax purposes; however, there are slight differences in the way the income is allocated to the venturers. Generally, joint ventures are the simplest way for multiple parties to share ownership of real estate. They can be less costly to administer and easier to dissolve than partnerships; however they generally do not offer any liability protection to the venturers.
Although less common, a trust can also be used to hold real estate. There are various types of trusts designed for specific purposes. One common type of trust is a personal trust, which is controlled by a trustee (or group of trustees) and can be used to provide income to selected beneficiaries.
The determination of the “right” ownership structure for a real estate investment depends entirely on the specific situation. Often, a combination of entity types will be utilized to allow for the most tax planning flexibility and to meet various investment objectives.
If you are looking to invest in real estate or already have real estate investments and wish to re-evaluate your ownership structure, please contact us to discuss your options.
Disclaimer: We caution that the above is a high level analysis and should not be construed as advice. There are several tax and other considerations beyond the scope of this article that would need to be considered in each situation.