(Part 3)
In the last two issues we looked at several different methods for
real property ownership, from tenants by the entireties, life estates,
revocable trusts and other methods allowed in Florida. These methods work for more basic needs but
when dealing with specialized issues such as asset protection, limiting
liability across multiple properties and foreign ownership, only ownership in
an entity can provide that extra protection, but with certain restrictions and
drawbacks.
Foreign owners who
would traditionally buy Florida property in their own name face substantial tax
and estate consequences on sale due to the Foreign Investment in Real Property
Tax Act and multi-jurisdiction probates.
Any sale to an investor or a sale over $300,000 requires withholding of
ten percent of the gross sales price regardless of profit or loss until a
withholding certificate is obtained. If
the property is held by an entity, this withholding can be avoided.
Entity ownership
instead of personal ownership can also serve as an estate planning tool. Instead of having a domestic probate and a separate
probate in Florida, the entity interest would be treated as personal property
and probated solely at home, with ownership of the real property remaining in
the entity.
Entity ownership
also limits liability from loss or damage due to issues at the property. Individual and trust ownership of rental
property exposes the personal owner to claims for loss, injury or damage in
connection with the property. For
example, if a tenant is hurt or dies at the property, the tenant or the
tenant’s estate can sue the owner and reach personal assets. If an entity is used, the tenant can only
look to what the entity owns (typically the property only) to recover
damages. While insurance can reduce this
exposure, entity ownership can reduce the need for excess coverage and the
costs associated therewith.
Traditionally the
most common form of entity ownership was the corporation. Corporations have existed for hundreds of
years, and are the best understood and most common form of ownership. However, corporate ownership has several
drawbacks from both a tax and reporting areas.
Corporations can be taxed as “C” corporations which is the default
status under Federal law. C Corporations
pay income tax on profits, and then the shareholders again pay tax on
distributions. These entities also are
liable for an additional Florida corporate income tax at a rate of 5.5%.
The alternative
tax status is an election to adopt “S” Corporation status. S Corporations do not pay either federal or
state income tax on profits. Instead,
these entities are deemed a pass through, with all taxes paid at the
shareholder level. However, this
election is restricted, as “S” corporations cannot generally have entity
shareholders, foreign owners or trust owners.
Another
traditional entity for real property ownership is the limited partnership. Limited partners, like shareholders, have no
personal liability beyond their investment in the partnership. However, the general partner of the limited
partnership does have personal liability (though most general partners today
are, in fact, corporations or LLCs).
To avoid the
problems inherent in corporations and partnerships, a new entity was created
called the limited liability company. Beginning
in Wyoming in 1977, the LLC is now valid in all states. The LLC combines the
limited liability characteristic of a corporation with the pass through tax
treatment of a partnership. LLCs can be
owned by foreigners, can have entity ownership for multi-layering (meaning the
members of the company can be another entity, including a foreign owner), and
have no limit to the number of owners.
LLCs are generally
less complicated than partnerships and corporations, with only two layers of
management (members and managers), and require less paperwork and meetings to
maintain viability. This lowers the overall cost of formation and operation. Delaware has even created a specialized LLC
called a serial LLC which allows for one parent LLC with a single tax id number
and accounting to have multiple LLC children, with the benefit of limiting
liability to each child LLC. This is
extremely useful for owners of multiple rental properties. Florida has not approved this format but I
expect it to be adopted in the future.
While entity
ownership has its benefits, it is not always the best approach. Financing can be more difficult to obtain,
and insurance costs can be affected. Choosing
the proper form of ownership requires planning and consultation with tax and
legal professionals. Failure to properly
plan can cause substantial problems after purchase.
Michael J Posner, Esq., is a partner in Ward Damon a mid-sized real
estate and business oriented law firm serving all of South Florida, with
offices in Palm Beach County. They
specialize in real estate and entity ownership and can assist sellers and
buyers in all real estate and entity matters.
They can be reached at 561.594.1452, or at mjposner@warddamon.com
