What’s a “Pass Through Entity” & How Does It Help Real Estate Investors?
A pass through entity is a business structure, such as an LLC, Series LLC, or S corporation. We use the term “pass-through” because you can claim the income of these types of businesses on your personal income tax returns instead of a separate business tax return.
That means you won’t be taxed twice and or have to pay thousands of dollars to a CPA to file a business tax return. Normally other business structures have to file a business tax return.
Do you and your spouse file joint income tax returns? That’s no problem, the above would still apply. But there are some instances where you will have to file a separate return, despite using a pass-through entity. We’ll discuss this, and some of the other basics you should know about pass-through entities, below.
The Partnership Return for Multi-Member LLCs
Some states require at least two members in an LLC. So let’s say you file your LLC in one of these states and have one other partner in it besides yourself.
Now you’re going to have to file what’s known as a partnership return. A partnership return is a separate return for your business itself.
Due to the complexity of a partnership return, you’re most likely going to want somebody to help you prepare it. I suggest you hire a CPA who is also a real estate investor to help you prepare yours.
Speaking of real estate…
Which Pass-Through Entity Is Best For A Real Estate Investor?
The Series LLC.
The Series LLC offers unbeatable asset protection, easy tax filing and is the foundation of a solid asset protection plan.
Say you own 5 properties. Instead of holding all 5 properties in one LLC, with a Series LLC you can create a “series” within your LLC. Each series will hold one property.
The benefit of this is if someone sues one of your series and wins, only that one property in that one series will be affected. The majority of your wealth and assets would be protected.
Another great benefit is, no matter how many “series” you have within your LLC, they can all be filed on the same income tax return. This is a huge cost saving benefit you can’t get with a regular LLC.
I hope you found this information useful. If you have any questions feel free to ask me in the comments section! And as a real estate investor, I think you might be interested in learning about the best LLC options for asset protection.
Finally, if you need help forming your pass-through entity, schedule your consultation today.