So you want to invest in real estate, possibly buying one or more rental properties, but are not certain if you should buy them in your own name, as husband and wife or through some form of legal entity. The decisions you make now regarding the purchasing of the real estate could save you time and money in the future.
Should I buy rental properties in my own name or as a corporation?
There are various forms of entity to choose from, sole proprietorship, general partnership, limited partnership, limited liability company (real estate LLC) or corporation (C-corp or S-corp). Initially, it is best not to own investment real estate in your own name or a general partnership. In both cases, the individual owner and each general partner will be personally liable for debts/liabilities arising out of the real estate holding.
It is also preferable, in Pennsylvania, not to hold title in the name of a corporation as selling it triggers additional tax liability and the need for tax clearance certificates, which can delay closing on the sale.
LP or LLC? Which entity is best to purchase a rental property?
Eliminating individual ownership and general partnership essentially leaves you with either an LLC or limited partnership. An LLC is cheaper and easier to set up and provides the same level of liability protection as a limited partnership as well as the same pass through tax benefits to the members of the LLC. A limited partnership requires the creation of a general partner, typically a corporate entity or limited liability company, which remains liable for the debts and liabilities of the limited partnership. The limited partners are shielded from liability. But that necessitates the creation of a limited partnership and a general partner. A limited liability company does the same work, with half the effort.
Can I transfer the rental property title to the entity after it’s been purchased?
As a preliminary matter, whatever decision you make regarding title to the property, make your final decision before buying the property. You don’t want to buy it as an individual and then after acquiring it transfer it to an entity you create. Such a scenario can create a double payment of real estate transfer tax, which can be significant depending on where you live. Thirty eight states, including Pennsylvania, have taxes that are paid for transferring title to real estate.
In Pennsylvania, if you buy property in your own name (and pay the transfer tax on that acquisition) and then transfer it to a company you set up to hold title to the real estate, you have to pay transfer tax a second time. To avoid that, simply choose a form of ownership and stick to it. Check out our past articles on county-specific real estate transfer tax for Philadelphia and Montgomery County, PA.