Posted by Brad MI on January 13, 2004 at 19:40:06:
Limited Liability Company?s (a.k.a. ? LLC?s) are generally the way to hold rentals and most lease-optioned properties.
The asset protection aspect of entities usually matters little when selecting an entity. That?s because in most states, LLC?s are cheap, provide the best asset protection and are tax chameleons, meaning that they can select how to be treated for federal income tax purposes. So when I say that a corporation works best for you, what I really mean is that an LLC that elects to be treated as a corporation is the best choice in most states.
What really distinguishes entity types is the tax treatment accorded each one. As such, choice of entity usually turns on the applicable tax rules. In fact, tax rules will determine the best entity for rentals, because they are the little darlings of the tax code. Specifically, rentals:
sell at favorable capital gains tax rates;
generate depreciation deductions;
generate tax upon sale that can sometimes be paid in installments, instead of all at once;
can be exchanged for other real property tax-free; and
may generate low-income housing credits
We want to select an entity that preserves these tax perks. Limited Partnerships (?LPs?) and Limited Liability Companies (?LLCs?) both achieve this goal better than any other entity. In most states, an LLC is cheaper and simpler to set up and run, so it is normally preferable to an LP. In addition to preserving rental property tax perks, LLC?s are the most flexible entity. Corporations have various restrictions on who can be an investor, what kind of income can be earned, etc. LLC?s are thankfully free of such pesky (and time consuming) issues.
Extarcted from Taxlaw