Structure options for real property investments
Florida residents with real estate investments may already be aware of the advantages of holding property in a limited liability company. An LLC provides pass-through taxation for its owners while also shielding them from liability. C-corporations also provide liability protection, but they are subject to double taxation, as they are taxed on profits and then shareholders are taxed on distributions.
Practically speaking though, those who borrow money to finance the purchase of real property may have difficulty separating themselves personally from the transaction with an LLC. Lenders are typically unwilling to give credit to an LLC to buy real property even with the personal guarantee of the LLC’s owner. Purchasing the property personally and then selling or transferring it to an LLC will not work in most cases because lenders typically include due-on-sale clauses in loan documents that cover these types of transfers.
A due-on-sale clause allows the lender to call the amount of the loan due if any ownership interest is transferred. One strategy that may allow an investor to enjoy the protections of an LLC is to lease the property to the LLC after purchase. The federal Garn-St. Germain Act preempts due-on-sale clauses in some cases, on properties with less than five units, for example. But it does not apply where there is an outright ownership transfer.
Thus, an individual may be able to purchase residential real estate with borrowed funds, and then lease the property to the LLC as a sublandlord. Such a structure may allow an investor to make use of some of the benefits of a limited liability company while still buying property with borrowed money to allow for maximum leverage. An attorney with experience in real estate law may be able to help structure the transactions or provide advice regarding other options.