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. Ordinarily, you would have to file a separate return for your business (or businesses).
The chief benefit of using a pass-through entity is that you won’t be taxed twice. Nor will you end up paying a CPA thousands of dollars to file a business tax return. Typically, other types of business structures will be obligated to file such a business return. We’ll talk more about the best entity for real estate investors below.
Some of you may be starting to think this doesn’t apply to you because you file a return jointly with your spouse. Well, you can relax. This poses no problems, and all the benefits described above would still apply. But there are some instances where you will have to file a separate return, despite using a pass through entity. The main case for this is if you’re using a partnership return.
The Partnership Return and Taxes
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 another partner in it besides yourself.
In this scenario, you’re going to have to file a document called a partnership return. A partnership return is a separate return for your business itself. By separate, we mean separate from your personal taxes.
Due to the complexity of a partnership return and its filing process, you would be wise to recruit somebody to help you prepare it. I suggest you hire a CPA, ideally one who is also a real estate investor, to assist you in preparing your return. And now, onto the bigger concern for real estate investors.
Which Pass Through Entity Is Best For A Real Estate Investor?
I so love when the answers to complex questions like these are simple. This one can be answered in three words: the Series LLC. Hands down.
The Series LLC offers unbeatable asset protection, easy tax filing and is the foundation of a solid asset protection plan. To illustrate how this works, play along with the following example.
Say you own 6 properties. Instead of holding all 6 properties in one LLC, with a Series LLC you can create a “series” within your LLC. Each series will hold a single property. So you’ll have seven companies total: the parent company, and then 6 individual series for your assets.
The benefit of this is if someone sues one of your series and wins, only that one property in that individual series will be vulnerable to costly judgments. That means the remainder, and likely the vast majority, of your wealth and assets would be protected. The Series structure protects those other assets and isolates them from the one in the line of legal fire.
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 money-saver that you won’t receive with a Traditional LLC. If you want to learn more, read my previous post about how the Series LLC works for real estate investors.
Congratulations! You’re now better informed on pass-through entities and the benefits of the Series LLC for real estate investors. Feel free to keep the conversation going by adding any questions or comments below. Thanks for reading, and good luck out there in the real estate industry. To learn more about how the Series LLC or another pass-through entity can benefit you, or easily set up your corporation, schedule your consultation today.