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3 Business Structure Mistakes Real Estate Investors Make

Let’s start with: Why have an LLC?

There are mainly two reasons why you want any kind of business structure:

Pay less tax, and protect your assets.

Before you jump into creating your LLCs for your real estate holdings, there are a few things to consider.  Do NOT make these three mistakes.

Mistake #1: Forming the wrong entity and/or in the wrong state.

Sometimes people get confused about their real estate investments and what the IRS considers them to actually be doing.

You could be a real estate dealer, which means you flip or wholesale properties. You could have a real estate business, which means you rent out property for short stays and provide substantial services, like a motel or some types of vacation rentals. You could be a developer which means you buy property and make changes to it before it is sold or put in service. Or, you could be a regular real estate investor and hold property that has long term renters (commercial or residential).

You first need to know what kind of real estate investor you are.  You will use different tax strategies and different types of structures depending on the type of investment.  For example, if you’re a real estate dealer, you have a business and that means you want an entity that is taxed like an S Corporation or possibly a C Corporation.  Flipping houses or flipping burgers…you have a business.

If you have long term rentals, you will most likely want a single or multi-member LLC.  If you are investing from Canada, you’ll want an LP (limited partnership).

Bottom-line, know exactly what you’re going to do first and then decide what the right structure is.  If you need to close quickly on a property and want an entity right away, your best bet is to use an LLC.  An LLC can decide later what type of taxing structure it should have.

The second part of this is setting up the entity in the wrong state.  Make no mistake, one way or another you need to have legal authority in the state in which your property is located.  If you buy a property in Ohio, you need an OH LLC or you need to authorize your out-of-state LLC to do business in Ohio.  (In effect, you’ll pay twice that way – once to the state that has your LLC and once to Ohio.)

If you don’t get your entity set up or authorized in the state of your property, you won’t have any legal standing for possible tenant issues.  One way or another, you have to have an entity in that state.

Mistake #2: REP with wrong structure.

The short answer is that if you want to claim real estate professional status (and all the great tax benefits), you have to be a named manager in a manager-managed LLC.

If you tried to do-it-yourself with an online LLC set-up or used someone to set up your LLC who doesn’t understand real estate tax law, you could have a problem.

Mistake #3: Not set-up or maintained properly.

The #1 mistake when setting up an LLC is failure to prepare the Operating Agreement.  Most of the online do-it-yourself websites mention it, but don’t give you the tools to do it.  Remember the manager-managed LLC is the type of LLC you need for your real estate investments if you ever want to take the “real estate professional” status.

Once the entity is set up, that’s not the end of it.  You need to continue to maintain the LLC with proper state and federal filings.  Plus you need to give proper notice in your business dealings.  Don’t sign contracts with just your name, use your name plus your title (i.e. Manager of ABC LLC).

Are there only 3 possible mistakes?  Of course not, but these are the most common.


  1. Comment by Jennifer
    March 8th at 4:52 pm 

    As to mistake #1. If you have a property management for a rental unit, would it matter if your LLC is held out of state? The property management in that state that is managing property should be represent you in legal issues?

  2. Comment by Marco Santarelli
    March 8th at 5:03 pm 

    Jennifer — Your property manager will only represent you when it comes to tenant/landlord related laws and issues. They are not attorneys and will not represent you on legal issues outside their scope of service. You’d need an attorney for that. When it comes to property related legal issues, you’ll want your LLC in the same state as the property, or registered in that state.

    Continued success!

  3. Comment by Jeremy
    March 9th at 4:44 am 

    Thanks for the information! Should an investor file state taxes in the state where the property is located (and LLC was formed)? Or does everything just pass through to his/her personal return in his/her home state?

  4. Comment by Admin
    March 9th at 1:26 pm 

    Hi Jeremy — if you set everything up properly, you will have disregarded entities and therefore there is no state tax form to file. Income and expenses flow straight through to your personal tax return.

  5. Comment by Rob
    March 10th at 7:49 pm 

    Great article! What entity should an investor use if they own a vacation rental that is being managed by a management company?

  6. Comment by Marco Santarelli
    March 13th at 11:12 pm 

    Hi Rob,

    In almost every case, it’s best to hold title to property in a LLC. Most asset protection attorneys would suggest this. I’m not giving you legal advice, but this is the best way in my opinion and the way I do it too.

    Continued success!

  7. Comment by Wes Thompson
    April 5th at 6:13 pm 

    Hi Team-

    Thanks again for the article. I own rental properties (in my home state) and have a management company managing those. Since the management company “does all the work”, I’ve been told that any liability could “pierce the corporate veil”, because law would identify the LLC as solely existing for liability purposes — so that the actual asset protection does not exist. They are all on my personal return, but I have an umbrella policy which I use for the corresponding asset protection.

    Does anyone have experience with actual liability in an “owner only” LLC where a management company is used? I’m just trying to confirm what a reputable attorney has shared with me in the past.

  8. Comment by Marco Santarelli
    April 5th at 6:25 pm 

    Hi Wes — that’s a very good question. Not one I have an answer to unfortunately. I hate to say it, but I’d check with a competent legal advisor who specializes in asset protection.

    I’d be curious to know what you find out. 🙂

  9. Comment by Jose
    April 18th at 9:24 pm 

    Regarding asset protection … I have several rental properties owned by a few single member LLCs. My accountant does my taxes putting all my properties in the schedule E and not mention any of my LLCs on my taxes. I am not sure if that is correct? And on the asset protection point of view that will be considered co-mingling, correct? What will be the best way to do my taxes as all my LLCs has one member (me) and not do comingling?


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