For the most successful businesspeople of today, establishing a real estate holding company has become a time-honored custom. If nothing else, there aren’t many vehicles that can shield new business owners from their bad intentions and those of other people.
To be honest, and for good reason, a real estate holding company might be scary to new business owners. The legal framework on which your entire business will be based is a holding. It is important to remember, nevertheless, that beginning one is not as difficult as it might appear. Although the beginning of a business depends on it, you shouldn’t be intimidated by it. Investors should instead practice due research and take advantage of all the benefits a holding company can provide.
What Is A Real Estate Holding Company?
A real estate holding company is a type of organisation created by law to shield business owners from the dangers of investing in real estate. Limited liability corporations (or LLCs), commonly referred to as real estate holding companies, possess various properties but do not engage in commercial activities themselves. The “limited liability” part of the structure’s name refers to the fact that it basically shields business owners from being held personally liable for obligations or debts incurred by the firm.
Although LLCs have been around since the 1970s, real estate investors have only recently started to become interested in their advantages. They are increasingly often employed as a strategy to lower individual exposure to financial and legal risk. Owning investment properties through a holding company is also known to produce considerable tax savings and simplicity of administration when compared to other legal organizations.
Although real estate holding corporations are not the only means to safeguard a company, the advantages are often seen to be the most favorable by investors. In other words, it wouldn’t harm to look into creating one for your safety if you wanted to learn how to launch your own firm.
Who Needs A Real Estate Holding Company?
Both short-term and long-term investors might consider a real estate holding business. Any real estate owner may gain from shielding their personal assets from potential company liabilities. It’s also a good idea to keep your rental revenue apart from your personal income. Holding corporations may be established for comparatively little money, and their advantages typically surpass their expenses. Keep in mind that if you’re merely buying a house to use as your primary dwelling, you don’t need to form an LLC.
A real estate holding corporation might be very useful in a few real estate investing specialties. These include those who invest in commercial real estate, passive income, and fix-and-flip properties. An LLC may also be advantageous for novice investors since it may offer more legal security. Whatever your investment plan, research the different advantages a real estate holding company might provide for your organization before making a choice.
Do Holding Companies Pay Taxes?
Taxes are paid by holding corporations, albeit the exact amount varies a little depending on the organizational structure. One business owner’s holding company, for instance, will normally be handled like a sole proprietorship. This indicates that owners must record all earnings (or losses) on individual tax returns rather than the company itself having to file with the IRS. A two-person LLC, on the other hand, will be regarded as a partnership. As a result, each owner will be liable for paying taxes on their proportionate part of the profits. If you have any queries about the taxation of holding companies, make sure to speak with an expert.
Holding Company Structure
The holding company’s organizational structure will often be like this: an LLC or holding company will be at the top, with many subsidiaries existing below. Subsidiaries in the real estate industry are frequently investment assets. The holding company will act as a parent business rather than being involved in the day-to-day management of each property. We will go through some of the advantages of using this structure below.
Real Estate Holding Company Example
An example of a real estate holding corporation may be used to show how this type of corporate structure would seem. I wish to establish a Business Holding Company, LLC in this example. I choose to buy an investment property after following the relevant steps (filing with the state, paying fees, etc.). A property manager will be in charge of overseeing operations, and the building will be held by Business Holding Company, LLC.
Let’s imagine that before establishing Business Holding Company, LLC, I bought an apartment building. I wish to transfer that property into my newly created LLC in this case study. To achieve this, I would get a deed, submit the required papers, and then transfer the ownership of the property. Of addition, I would revise any leases and tenant agreements that need to be updated to reflect the change in ownership.
Now, Business Holding Company, LLC manages my two properties. The combined operational income, liabilities, and ROI would then appear on the holding company’s balance sheet. I would be in charge of supervision and assistance as the owner. Even though it is a gross simplification, this illustration might provide you with a general idea of what a real estate holding corporation can include.
Why Start A Real Estate Holding Company?
A real estate holding business has grown in popularity over the past ten years, and for good reason. Real estate investors can receive special benefits and improve the long-term viability of their companies by incorporating them. Benefits of real estate holding companies include, but are not limited to, pass-through taxation, the protection of investors from personal responsibility, and the development of credit for your firm.
- Business owners can be shielded from responsibilities and debts incurred by their properties through holding companies.
- The double taxation of investment properties is avoided by holding companies.
- Investors can manage their homes more effectively thanks to the corporate framework.
- LLCs often pay less in fees than corporations do.
- Investors have more freedom to disperse their gains withholding corporations.
- Real estate investment firms make it possible for investors to buy homes both domestically and internationally.
- In comparison to other corporate kinds, a holding corporation is easier to transfer.
A real estate holding company is also extremely simple to register, which will gratify anyone asking how to put one up. The details of each of the primary advantages, as well as some of the less well-known perks, are provided in the sections below.
Limits Personal Vulnerability
Real estate investing is a rather rewarding career path. Every agreement involves a lot of money or at least more than the ordinary person can afford to pay out of pocket. However, it is vitally crucial for each investor to safeguard their own funds (that outside of their business finances). The most exciting feature of establishing a holding company is that LLCs minimize personal exposure to possible litigation involving the property.
Any legal action taken against an LLC is directed only at the business, not the person running it. If the property in issue were held by an LLC, the company’s protection would limit the owner’s risk exposure, leaving just the assets controlled by the LLC (as opposed to all of the owner’s assets) vulnerable to prospective legal claims. In other words, your financial security wouldn’t be at risk.
Pass-Through Taxation
Taxes come in second if liability protection is considered to be the most crucial aspect of setting up a real estate holding company. In fact, some real estate investors are considering structuring their company as an LLC only for tax reasons. For some people, liability protection could be a plus.
Real estate investors can avoid double taxation by purchasing property through LLCs according to a 1988 court decision. The Internal Revenue Service (IRS) classifies a real estate holding corporation with a single owner in accordance with the default tax classification rules in the same manner as they would a sole proprietorship, otherwise known as a “disregarded entity.” As a result, all profits and capital gains made by the company would be transferred to the owner, who would then only be required to pay taxes on an individual basis. The individual owner is still shielded from responsibility, though. The greatest of both worlds are together.
Business owners can prevent double taxation because there isn’t a separate tax associated with the creation of an LLC. There are no tax penalties associated with either a property’s rental income or its value growth after the sale. Additionally, during tax season, the proprietors of a single-member LLC are able to deduct mortgage interest. You not only pay less tax when you create an LLC, but you also get additional deductions.
