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How to set up a real estate business

Dear Tax Talk,
What do you suggest would be the best company formation for a business completing real estate transactions such as buying and selling homes, rental property and commercial structures from an asset protection position? Please advise. Thanks. -- Erick

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Dear Erick,
When starting a new venture, it is always best to start out with a new company. For real estate purposes, the most advantageous form of doing business is a limited liability company. It offers asset protection to owners in the same way that a corporation does, and for tax purposes it is treated as a partnership if there is more than one member.

Of course, if you have to personally guarantee loans on the properties, no entity will offer you indemnification from these debts. However, you will get personal indemnification from most forms of lawsuits if you properly respect the form of entity, by not commingling personal and business activities.

One advantage of an LLC over a corporation is that the owners pay tax on the profits of the partnership and therefore avoid two levels of taxation. While it is true that a corporation can elect to be taxed as an S-corporation, to avoid the two levels of taxation, the shareholder cannot deduct losses beyond their investment in the S-corporation.

In an LLC that is taxed as a partnership, the owners can use the debts of the partnership to claim losses in excess of their investment. Therefore, an LLC becomes the superior choice when there are leveraged assets.

Bankrate.com's corrections policy
-- Posted: Sept. 16, 2005
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