LLC Home Purchases: Forming Companies for Security or Fraud?

Posted on Apr 23 2018 - 12:30pm by Liz Dominguez
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llcEverything about today's world is public. Lives are on full display because of social media and tech puts everyday life data like personal running stats in public view. So, it's no wonder homebuyers are looking for privacy through any means possible—and forming a limited liability company (LLC) to purchase property is gaining ground quickly.

Here's why many turn to LLCs to buy homes:

Privacy

Concealed identity? Check. Hidden home address information? Double check. This is the No. 1 reason many high-end buyers decide to form an LLC. With celebrity or multi-millionaire status comes the potential to lose privacy and, so, home-buying anonymity becomes necessary to lead a semi-private life.

Protection

Most popular among real estate investors, the protection benefits that LLCs offer can save personal assets from being targeted in a lawsuit—think tenants hurting themselves in their apartment and seeking financial compensation from the landlord. With an LLC, only the company's assets are in danger, reducing liability if something does happen to someone inside the property. Buyers should keep in mind that although liability insurance can have wider limitations than the protections an LLC provides, it may be a more affordable option.

Tax Benefits

Everyone loves a tax benefit and that's why LLCs are so attractive. Under the new tax law, small business LLCs qualify as pass-through entities and are only taxed on 80 percent of their pass-through income; however, since the tax law is still so new, those interested in forming an LLC should meet with a financial advisor to see if they meet the pass-through requirements.

Simplicity

Lastly, an LLC is easy to set up and easy to manage. Owners can either oversee the LLC themselves or hire third-party managers. And in many cases, state registration and maintenance fees are lower than those imposed on other business entities. They even have less cash flow and distribution restrictions than S corporations.

But it's not all rainbows when it comes to LLCs. The entity's anonymity can draw in a fraudulent crowd. The question is, how many buyers are filing LLCs for legitimate reasons and how many for illicit purposes? Government officials have reported that LLCs have been used for a variety of illegal practices, such as drug trafficking and human smuggling; that's why New York is looking to implement public disclosure laws for LLCs, according to The Wall Street Journal.

And according to USA Today, out of the $1 million-plus real estate transactions that were reported to the federal government in Miami from August 2016 to March 2017, half were from individuals who were already being monitored for suspicious financial activity.

Homebuyers should consult a tax advisor before forming an LLC to purchase property. Depending on the state, affordability may vary and so do protections—LLC University provides a state-by-state list of LLC filing and annual fees. Buyers should consider that with the rising potential for fraud, sellers may be suspicious of accepting an offer from an LLC.

 

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