LIMITED LIABILITY COMPANIES AS REAL ESTATE HOLDING COMPANIES

By James W. Mallonee

We are sometimes asked if a person’s homestead real estate should be placed into a Limited Liability Company (LLC) as opposed to being titled as Husband and Wife (e.g. Tenants by the Entireties). The short answer to that question is “it depends” on what you trying to do with the property.

If the property is Florida real estate and it is your permanent residence then in this author’s opinion, the answer is not to place such property into an LLC. However, if the property is either a secondary home or commercial real estate then in such case it might be best to title the property into an LLC.

Let’s face it, Florida has one of the greatest advantages for permanent residences owned by a husband and wife (or a single person) called homestead. You do not have to pay anything for it and it is guaranteed by Florida’s constitution. It protects the homeowner from losing their property to a creditor (such as hospital creditors, credit card creditors or for that matter any creditor with some exceptions). Those exceptions are the mortgage companies, property taxes, Internal Revenue and companies that improve your residence and are not paid for the improvements (this does not include the person who mows the grass).

If you are thinking about placing ownership for your commercial or secondary real estate property into an LLC be sure to keep in mind that this author’s opinion is to have at least two members as part of the LLC. That is easy if the LLC is represented by a husband and wife as its members, but not so perfect if it involves non-family members. The remainder of this article is only focused on multimember LLC’s.

Under Florida law a debt or obligation of an LLC is the sole responsibility of the LLC and not its members on a personal level. Only the assets of the LLC are vulnerable, thus each property should be a separate LLC and if one of the LLC’s gets into trouble, it will have no effect on the others or the members of those additional LLCs (there are some exceptions). In essence, it will not affect the personal assets of the LLC members. Thus, if one of the members has an outstanding debt, the debtor can only have a charging order issued against the sole debtor and its satisfaction can only come from any distributions made to the debtor (not the LLC).

What about taxes? In Florida, the Federal Taxation for an LLC would be similar to a partnership. You could elect to have the LLC taxed as a “C” or “S” corporation by filing the proper form with the IRS (form 2553). Ideally, in this author’s opinion that would be an “S” corporation.

Because your property can be titled as an LLC, you get the luxury of avoiding probate at the death of one of the members as well as treated as an ancillary administration should the property be the permanent residence of the decedent not living in Florida. Because an LLC is also property that can be passed by titling, it is recommended prior to death to set up the LLC to pass to another as part of a “transfer-on-death” scheme. This would require that the bylaws or operating agreement of the LLC grant the ability to pass an owner’s interest in the LLC via transfer on death. In essence, by owning property in an LLC, the estate administration in Florida (Probate) could be avoided.

So why isn’t everyone doing this? The short answer is that it is not for everyone considering the following issues:
1. If you place your homestead property into an LLC, you will no longer have the protections of homestead nor the tax savings.

2. Transferring into an LLC does not avoid Florida’s documentary taxes.

3. Mortgage companies usually have terms within the promissory note or mortgage stating that if the title to the property is changed the mortgage holder has the right to foreclose.

4. The property tax collector gets the luxury to tax annually the property at the maximum rate.

5. Title insurance may be limited.

6. Property and Liability insurance may also be limited to the members of the LLC and not the actual owners. This can be a real problem if members to the LLC are not husband and wife.

7. Financing may also be limited because some financing companies (banks) want the actual owners to be on the hook should foreclosure take place.

Although transferring real estate into the name of an LLC may seem like a real benefit, it also has some drawbacks. In the opinion of this author, only those properties not classified as homestead should be considered for LLC status.

LAW OFFICES OF JAMES W. MALLONEE, P.A.
www.jameswmallonee.com

 

This article is intended for informational use only and is not for purposes of providing legal advice or association of a lawyer – client relationship