Update on Use of Limited Liability Companies for Real Estate Ownership

By: Louis J. Rogers, Attorney At Law
(804) 771-9567 – [email protected]

The Virginia Limited Liability Company Act (the “Act”) permits limited liability companies (“LLC”) to have single members which provides a number of exciting planning possibilities for real estate owners, including the ability to hold multiple real estate projects in single-member holding companies. Using a single-member holding company structure allows property owners to enjoy all of the benefits of being an LLC, such as limited liability for all members, without preparing and filing multiple tax returns.

As an example, consider Ms. Investor, who along with two of her sisters, owns an undivided one-third interest in four different office and rental projects they inherited from their mother. As tenants-in-common, the three investors have potentially unlimited personal liability for losses associated with each of the properties. A slip and fall injury, environmental incident, or casualty, for example, could prove costly to each investor. By employing a “holding company” structure, however, each investor could shield herself from liability while maintaining the value and profitability of the properties.

Creating a holding company is now easier with the changes in the Act. In the case of Ms. Investor, she and her sisters first contribute their undivided interests in their properties to an LLC that serves as a holding company. Ms. Investor and her sisters then become the members of the holding company. This first step protects the three investors from personal liability; however, Ms. Investor and her sisters may go a step farther in protecting their investment by causing the holding company to convey each of the properties to separate, single-asset subsidiary LLCs. These subsidiary LLCs greatly reduce the impact that a loss or liability associated with any one property might have on another property.

Because each single-asset subsidiary LLC is treated as a branch or division of the holding company and not as a separate partnership for tax purposes, it is not necessary to prepare partnership tax returns for each individual subsidiary LLC. Instead, the taxable income and losses of each subsidiary is reported on the holding company’s tax return.

With this holding company structure, if one of Ms. Investor’s projects suffers a casualty, the holding company’s maximum exposure should be limited to the loss of that single property. The holding company’s other three properties should be insulated from liability and remain unaffected.

Of course, any entity structuring undertaken or tax planning involves an examination of an investor’s entire tax and financial situation. For more details on the use of limited liability companies, please consult your tax and legal advisors.