EXCERPT: Single-member limited liability companies (SMLLCs) are limited liability companies (LLCs) with only one member (owner). As with a corporation, operating a business or investment activity as an LLC generally protects your personal assets from exposure to liabilities related to the activity — under applicable state law. However, SMLLCs offer some unique tax attributes that make them ideal real estate ownership vehicles. Here’s the story on their advantages.
Advantage: Disregarded SMLLCs are ignored for federal income tax purposes
Under IRS regulations, the existence of an SMLLC is generally ignored for federal income tax purposes. In other words, the SMLLC is a so-called disregarded entity. The federal income tax treatment of a disregarded SMLLC is super-simple: its activities are considered to be conducted directly by the SMLLC’s sole member (owner). For instance:
* When a disregarded SMLLC owned by an individual is used to own rental real estate, the federal income tax results are reported on the individual member’s Form 1040. You need not file a separate federal income tax return for the SMLLC.
* When a disregarded SMLLC is owned by a partnership, the SMLLC’s federal income tax results are reported on the partnership’s federal income tax return (Form 1065). No separate federal income return is required for the SMLLC.
* A disregarded SMLLC will deliver to its member (owner) the liability protection benefits specified by the applicable state LLC statute. These liability protection benefits are usually similar to those provided by a corporation.
Strategy for real estate owners
Here’s where it gets even more interesting. The disregarded SMLLC’s member (this could be you) is considered to directly own for federal income tax purposes any real estate that is actually owned by the disregarded SMLLC. Therefore, an exchange of property owned by your SMLLC will be treated as an exchange by you personally for purposes of the Section 1031 like-kind exchange rules. Continues…