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Best Entity for Investing In Real Estate – (LLC, Land Trust or Corp?) [NEW]


– Hey guys, Toby Mathis
here from Anderson Law Group and Business Advisors, and hey I’m gonna go over a
couple things today about the best entity to use
for your real estate, and the easiest way to do this is by explaining what your options are. (energetic rock music) Subscribe to the YouTube channel, click the bell notification icon (bell dings) so you know when a new video is uploaded. Tax laws are changing all the times, the laws are changing all the time, that’s why you’re first to
know, you’re first to grow. First off, credentials. I’m an attorney, I’ve been
doing this for over 20 years, have well over a hundred properties that I own or control, and if you are dealing with any professional that does not do what you’re doing, you should really give pause and think whether you want to work
with that individual, simply because there’s
so many nuances involved with a specific activity. If you’re in real estate,
you better be dealing with somebody who
actually owns real estate and understands the nuances, otherwise they’re gonna read out of a book or they’re gonna read out of a case and they’re gonna try to
tell you to do something that may not be practical at that time, ’cause it is fluid, it moves around. So for example, 20 years ago you could close a commercial property in your individual name. You can’t do that any more
after the big fiasco in 2008, they don’t want to be exposed
to your personal stuff, and so almost always if you’re dealing with commercial property
you’re gonna be closing an LLC. This is absolutely the case
’cause if you have financing they will not even do financing any more for the individual. You’ll be a guarantor,
but they’ll almost always make it be an entity. So this is really important, because little distinctions like that can have a major impact on your planning. For example, let’s go into
the single-family realm where you’re dealing
with rental properties. It’s the opposite there. They’re not gonna allow you, you cannot go into a
U.S. Bank or Wells Fargo and get a loan and say
hey, let’s put in the LLC, it’s just not going to happen,
that’s a commercial loan and they tend to be wiggy if
it’s residential property. So if I’m doing a single-family residence, a duplex or a four-plex, more than likely I am going to have to close in my name and then transfer it into an entity. Well, it becomes a very
different story of like hey, in a perfect world I could just close in an LLC, for example. That may not be possible,
I may need to use an intermediary entity to mitigate the risk of having that note called due. And first off, we’re gonna make sure that that note is still paid, we’re not gonna prejudice a lender, but we also don’t want to cause
ourselves unneeded trouble by triggering a due-on-sale
or something like that by tossing it in directly into an LLC. There’s also tax implications. So for example, where I’m at in Las Vegas, in Clark County I can put a
property in an LLC, no tax. If I take it out of an LLC, tax. The way around that is
using the first entity I’m gonna cover, and
that’s using a land trust. So you get used to using these, and you get used to working with them simply because it’s
something you have to use. Like hey, if I don’t want to
pay an exorbitant amount of tax I might have to use one of these entities, or if I don’t want to
trigger a due-on-sale, I may have to use this type of entity. So the land trust is number one, and a lot of people misuse them, they don’t understand
exactly what they are. What a land trust is good for is privacy, because your name is not on the deed. You can actually get
these to where your name is nowhere on the deed. So they’re great for
privacy and holding title. What a land trust really
does is it separates out legal ownership from the
beneficial ownership. This is really important. So when you go to where
land trust came from, it was Illinois, it was the Sears Tower. They’re acquiring properties,
some of you guys know the case that I’m talking about. But the court basically said hey, a land trust is when
legal title is separated from beneficial interest. Legal title does not mean you’re liable for the things that occur on the property, but the ability to rent it,
the ability to control it, the ability to do things with the property is actually separated
from the legal owner. Another situation where this was used is down in Disney World. They were able to acquire properties without anybody knowing what was the group that was acquiring it. It was actually really important so that they didn’t jack up the price, or for people to try to block the acquisition of those properties so they could build Disney World. Those are some just examples. In our world, we tend
to use it because hey, let’s say I have a bunch of properties, we’ll just say one, two, three; one, two, three. I may have loans on each one of those, and I may not want to
have to you know, hey, if I put each one into an LLC I may not want to have to
go through the rigmarole of contacting the lender and
trying to get it justified. I may just go ahead and use a land trust where I’m just isolating
each one of these things out, and then I can assign them to an LLC. Now, best practice is always gonna be to separate each property into an LLC. But what if I have a portfolio
loan or something like that? I may be required to have one
loan on all three properties, in which case I may have a singular LLC that becomes the
beneficial interest holder. Now some of you guys are losing your mind. This is not best practice. Best practice is to have
an LLC for each one. But, you could do this, depending on whether you’re dealing
with a hard money lender or what type of lender
you’re dealing with. So I’m just gonna make
this a little bit simpler, and I just mentioned the
second type of entity we’re gonna be talking about. If I am holding properties,
if I am holding properties what it comes down to is there’s really only one entity you need
to know, and that is, for asset protection, I’ll just clarify, and for tax benefits. I am buying and holding, I am using an LLC which stands for limited
liability company. If you ever say limited
liability corporation in my presence, I’m probably
gonna make fun of you. An LLC exists for state law, and it puts a box around the entity or the activities of
that particular entity. So for example, a piece of real estate, it puts a box around it
so if something happens on that real estate it doesn’t
contaminate everything else. The easiest way to think of
this is if you had luggage, and you have perfume or cologne, depending on what you’re into, and you have your shaving cream and you have your toothpaste. Well, all three of those
things, I go on a plane, could all three of those things explode? Yeah, so I’m gonna probably
put those in a toiletry bag, or I’m gonna put them
in a Ziploc or something so that it doesn’t get all over my clothes if something bad happens. Well, if they’re all in one bag then if the shaving cream
explodes, for example, it’s getting all over your
toothpaste and your cologne. All we’re doing is we’re putting
them in separate baggies. So let’s just say I had
a baggie for my cologne, I had a baggie for my toothpaste, and I had a baggie for my shaving cream. All I’m doing is making sure
that if one of those explodes, it’s not getting all over everything else. That’s inside liability. So that’s what we use for real estate. A land trust does not protect you, does not protect you for asset protection. It’s a title vehicle only, where you’re separating
out legal ownership, what’s on the title, from
the beneficial ownership. Then what I’m gonna do is I’m gonna assign the beneficial interest to an LLC. So in our example, I may
have LLC one, two, and three and I could just take
my beneficial interest and I could just assign it to my LLC. Nobody sees that. So if that LLC, for
example, has my name on it, there’s no anonymity, I
can make sure nobody knows that it’s connected to
that piece of real estate. So for example, if something
happens on this house, all they see is the
name of the land trust, and that land trust, a lot of
you guys don’t realize this, you can use either a nominee trustee or you can use an entity as a trustee. I know some of you lawyers out there, your eyes are rolling back going hey, you can’t use an entity. Yeah, the rights to enforce
is actually the beneficiary which you’re controlling. We have no problem using an entity, and I haven’t seen any issues with it in years and years and years. What you do is either use a
nominee or you use an entity. Whatever the case, I can
keep my name off of it in a public record. So if something happens
on that piece of property, they don’t see Toby Mathis all over it. But let’s just say, in a
weird world that it did, they also wouldn’t see
that the LLC is connected. They’re not gonna see
these other properties. And what we’re really getting at is that if something happens here, the world that they can see is
only that particular entity. It’s that land trust. If they sue, they’re only seeing that LLC, they don’t see everything else we have, and realistically the best defense is not to let them see
everything that you own. If they see everything you own, and you have a bunch of
properties, guess what? You’re probably gonna get sued way more often than you like. If they can’t see what you own, and they don’t know whether
you own two properties or 200, then you’re not inviting that, and we’ve seen that
work over and over again ’cause people always say
well, have you seen that? Yes, I actually saw, we
actually had a father-son team where son did exactly
what I’m showing you, father did not, they had
a liability occurrence in one of their business and
they settled out with son for almost nothing like (fingers snap)
that, immediately. And then with the dad,
they kept pursuing the dad because they could see everything he owns. I’ve also seen this work in rentals where somebody had a
single rental property in their personal name,
and all they did is they Googled the individual,
saw where they lived, and said hey, you must
have a lot of money, you live in California, and
the property was out-of-state. And they were like hey, we know that you have something to lose, so they weren’t just looking
for insurance any more but they were actually pushing on the guy simply because they thought
because he lived in California in a nice area that he
had a bunch of money, and the guy was like literally
saying this is ridiculous, are lawyers allowed to do that? And the answer is yes. So how do you protect against that? You don’t let people see what you have. This structure right here, if all I did was use a land trust plus an LLC on my rental real estate will keep you out of 99% of the problems. This is the structure that you use. Now, you could bypass the land trust. The land trust is our friend if there is debt on the property. If there is no debt
and you’re buying cash, you can go straight to an LLC. I just have found, in
my personal experience, that it’s much easier
if I’m making a lot of bids on properties, for
example I’m in Las Vegas. In 2007, eight, nine, 10, 11, 12, when the economy was doing
all sorts of weird things, we lost 75% of our values in the valley. So I was bidding on properties constantly. People would go down to the auctions and you buy them cash, or you’re bidding, you’re doing on short sales. Then there was days where we
put in 20 bids on properties. I kid you not, and you
had to have a methodology. I did not want to put the bids in my name because some of them I may not even keep, some of them I’m gonna
possibly wholesale off and give them to my friends. But for the most part we were just trying to acquire properties,
and in that particular state people would get their houses trashed and you could buy them and fix
them up and sell them again, you could make a little
bit of money doing that and we were doing that quite
a bit, as were our clients. But you didn’t want to be
trying to set up an LLC every time you wanted to put in a bid, and you didn’t want to have
20 properties in the same LLC. So the easy way to do this
was just to put the bids in the name of the land trust. I would just have a succession of trusts, and I would always put in a bid and then if I got it accepted, that’s when I would
actually create the trust. For me it was really
easy, I had a methodology that I would use, I’d use ABC LLC, trustee of whatever the
trust name I was gonna use, and a lot of times we
use the property address. Some of you guys are gonna say I don’t want to use the property address. Fine, but that’s what
we used at the time was I’d always use the
property name plus trust. So if it was on 123 Main Street, I’d just call it the Main Street Trust. And that was it, it was
really easy to put in offers, I didn’t have to think about it. It was automatic, and then if was accepted it was really easy for me
to create that document after that point when we were
actually going to closing. So it’s up to you as
to what works for you. I’m just gonna tell
you what I’ve seen work for myself and my clients, and quite often it’s using that land trust and the LLC, and that’s about as
complicated as you have to get for owning the property itself. Now, if I isolate this property and I keep the liability inside an LLC, there’s still me sitting out here. Here I am, and I’m driving around, I’m doing activities
where I could get sued. Well, there’s something
called outside liability where they can actually take my LLC away. So let’s say I get into
a massive car accident that I cause, and they
sue the heck out of me. They don’t care about what I own, they just want to take and scorch Earth and put me into bankruptcy, right? They just want to see what they can get. I need to make sure that
they can’t just take my LLCs, and in most states they can. So depending on your situation,
I’m just gonna tell you there’s a really easy fix to this which is instead of me owning my LLCs directly, I will more than likely
have a Wyoming LLC. Pretend that says Wyoming. I’ll more than likely have
a Wyoming LLC own my LLC, and then I will own the Wyoming LLC, and the reason that you do this is ’cause Wyoming has protections that do not allow people
just to take the LLC. They can get a lien
against it, and that’s it. Most lawyers aren’t
litigating to get a lien, they’re litigating to get paid. So the fact that they can’t
force themselves or force money means that they’re not gonna
be nearly as aggressive, and you’re gonna be in
a much better situation to settle anything that’s occurring. Now, that’s for outside liability. So then all of a sudden
we just took away this, and now the outside liability
is going towards the Wyoming. Now, taxes. All of this could be set up
to be transparent for taxes, meaning that it’ll all end
up on your 1040 Schedule E, just like you owned it individually, and there’s two ways that occurs. We either set it up as
a disregarded entity where the IRS is literally
ignoring all those LLCs and the land trust, and I am
giving you the honest truth, you could have a hundred properties and a hundred different land trusts with a hundred different LLCs
with zero extra tax returns. It all goes onto your return,
if that’s what you want to do. Now, again, this is why you use people that actually do real estate. If I have commercial property
and I’m gonna sell a property, the buyer is gonna need
to see a tax return and I don’t want them
looking at my tax return. So I’m more than likely
gonna make that entity a partnership, and I’m
either gonna make it a partnership by maybe
it’s me and my spouse, maybe it’s I use a partnership by having my corporation as a part
owner or as something else as a part owner, or my
LLC is a part owner, it’s me as a part owner with my LLC. I may be able to make that into
a partnership fairly simply so that I actually have a 1065 that I can give them on
that piece of property. That’s gonna be the difference between whether they can get financing or not. So now, I told you I’d go
over three main entities. So we did the land trust, and we’ll just call that one. I did the LLC, two. And then the last one is our friend the corporation. And by the way,
corporation is nothing more than a tax designation, so
I could be a corporation or I could be an LLC
taxed as a corporation. So when I talk about a corporation, for those of you guys
that are pretty savvy just know that I’m talking about it can be an LLC taxed as a corporation. But that’s the other category,
and I’m gonna use this when I have active real estate. And when I say active, that means things like wholesale, flips, I might be doing it if
I’m a real estate agent. That’s going into a corporation. You do not put your buy-and-holds
ever in a corporation. There may be one or two
exceptions to that rule, but I’m just gonna make it real easy. Your default is your
buy-and-holds always end up going into an LLC. If you have debt, you use a land trust. If I have a lot of properties and maybe I’m doing a portfolio loan, then I’m probably doing
land trust with the LLC ’cause I don’t want one LLC
being on 20 pieces of property. I’ve done those loans, they want to have a special purpose entity
that is owning the property, and you do not want to
have all those properties in one name, even if
you do have financing, ’cause the most they’re
gonna get is the equity, I get that. But your lender is almost
always gonna say hey, I want to have this entity. And they’re also, by the
way, gonna be pointing at this guy, too, they’re
gonna want a holding entity. Although, if you’re dealing with a major like a hard money lender
or a portfolio lender or things like that, they’re almost always gonna want to see a Delaware
entity under that circumstance, and I’ll explain that someday. But from a 10,000-foot
view, what we care about is that there’s three entities, and here’s what they are, again. A land trust is for holding title only, has no asset protection. You always marry a land trust with an LLC. An LLC is what you use for your holds. Make it simple. Your LLC will not destroy
your 1031 exchange, your installment sales, my
ability to do depreciation, it has zero impact on it. It will all flow down
to you if it’s an LLC that is set up as a
partnership or is disregarded. Now, if I set up an LLC
and tax it as a corp, I’m only doing that if it’s active. So if I’m flipping properties
then I’ll flip through that just because there’s an adverse impact if I do it and it flows under my return. And I’ll make it real simple for you. If you are buying and holding,
so if I buy a property to hold it, it does not
matter my holding period, it really doesn’t guys,
that’s not the test. The test with the IRS
is why did you buy this? If I bought this to hold it, it’s gonna go onto my 1040 Schedule E. If I file this as a partnership, it’s going on a 1040 Schedule E page two, and it’s going on via
K-1 from the partnership, a 1065 return. Now, if I am buying a piece
of property to sell it, the holding period does not matter guys, there’s actually cases out there where people held it
for more than 10 years and they were still deemed
to be an active business. That’s called a dealer. If you are a dealer, a developer,
then it is active income and the reason this is important
is you lose the ability to defer your taxes
with installment sales, you lose your longterm capital gains, and all of it is active and
subject to self-employment tax. So we combat that buy
using the corporation. We can reduce the tax hit by using an S corp in that situation, or sometimes a C corp. But in either case, we want to make sure it doesn’t just go right onto your return ’cause if it does, it’s
going on a Schedule E which is a sole proprietorship, and you lose all the
benefits of holding property. I want to make sure that my buy-and-holds are separate from my active flips. So if I’m a flipper and I’m an investor, never do that in one entity. Don’t do that in your name. You always separate those out, and I’ll just give you a rule of thumb. The best way to structure it
is to have LLCs for the holds, and an S corp for your
flips or possibly a C corp; and you talk to a professional who actually understands these things to give you the end all, be all. Now you can change your C corp
to an S corp and vice versa. So if you mess it up, you can
always go back and fix it. In fact, you can actually
make an S corp election even a year after. If you screw it up,
there’s ways to fix it, just leave it at that. But you want to make sure
you’re talking to somebody, don’t go and try to do this online, don’t go out and think that
there’s a cookie cutter approach to it, there is not. You want to make sure somebody understands what it is that you’re doing, what you’re trying to
accomplish, what your purpose is, and then they want to marry
it to one of these guys. Now, are there other entities out there? Are there IRAs, 401(K)s, are
there limited partnerships, are there limited liability
limited partnerships? Yes, there’s all these
other things out there, and facts and circumstances will dictate whether they’re important. But no matter what it is, it
could even be a non-profit, you’re still putting it in an LLC if you’re buying real
estate and holding it. Even if you’re in your IRA, you’re still putting it in an LLC ’cause you want to make sure
that you don’t expose yourself and all your other assets to liability. You’re still doing this, and if there’s any debt on the property you’re almost always gonna
be using a land trust. And you may, depending
on what you’re doing, you may always be marrying
these two together. At our firm, we tend
to be really bullish on making sure that your name doesn’t appear in a public record. I can’t do that, necessarily,
with an LLC by itself, I’m gonna really be using the land trust. So if I’m buying lots
of pieces of real estate and I’m starting to accumulate a substantial amount of assets, the easiest way to make sure
that you never get sued is if nobody can see what you own, and that’s how you use this little guy. But a land trust by itself
will not accomplish it, you always marry these two together. So whenever you see a land trust, you’re probably gonna see
an LLC on the back of it if you’re working with
a good practitioner. If you’re just doing the LLC, then more likely than not
we’re gonna see a holding LLC along with it. If you’re doing a
corporation, then quite often we’re gonna see entities
underneath that corporation, LLCs underneath the corporation even. And remember, the corporation
is just a tax designation and it can own other LLCs,
so anything that we’re doing we can still isolate out their liability. So if you’re an active flipper,
then there’s a good chance that the flipping corporation is just the tax return it’s going on, and you may see little
sub-LLCs underneath it holding the properties,
’cause you’re actually generating a bunch of income
and we don’t want to get sued, and we want to minimize our liability if there’s ever a situation. Like somebody falls off the roof, you don’t want to have your other 10 flips that are in progress to get affected. You want to make sure
that you’re isolating it. Or if you’re doing one or two, you have two projects going on, you don’t want project one
to interfere with project two or vice versa, and you
want to isolate those out so if anything goes wrong
you’re minimizing your risk. So I hope this helps give
you a little overview. So again, I’m just gonna reiterate this, your rule of thumb is if I
have single-family residences, duplexes or four-plexes,
and I have debt on them, I’m almost always using a land trust. If I don’t have any debt, then I may be putting it in an LLC. If I have multiple pieces of property, I’m not going to own my LLCs directly, I’m gonna have a holding
entity like this little guy more than likely holding my interest to protect the properties from me, and me from the properties. And then if I am a flipper, or
if I am a real estate agent, or if I am a developer, or
a dealer, or a wholesaler and I’m actively making the
money in the real estate, I’m almost always gonna be
an LLC taxed as a corporation or just a flat out corporation. Your state, and the rules in
which you are operating under, will dictate what we’re using. And I hope that helps
you make better decisions in your real estate investing. (upbeat music)

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