Written by: Legally Speaking

Is Your Real Estate Investment Protected Against Judgment Creditors?

It seems to be recurring news … though not necessarily news! The South Florida real estate market is HOT! Out-of-state buyers continue to flood the market with cash purchases creating a bidding frenzy and sellers aren’t complaining. There is one question I get asked frequently, however: What is the best manner to buy and hold real estate in Florida to protect against judgment creditors?

As every real property investor knows, Florida is one of the most tax friendly states without having a state tax, making investing here lucrative. Yet, tax questions aren’t the only concern. Protection from lawsuits and creditors is frequently on buyers’ minds.

Luckily in Florida, there are numerous entity choices available for holding real estate property purchased for investment purposes to protect oneself from judgment creditors. Buyers have the choice of either setting up a corporation, which they can then elect to be classified as an S corporation (S corp), or forming a limited liability company (LLC).

If choosing to set up a regular corporation, the individual officers and directors are considered separate from the entity. Further, S corps separate corporate shareholder assets from corporate assets. This protects shareholders’ personal assets from professional liabilities. Corporations are smart to protect against liabilities, but real estate that goes into either type of corporation is never really tax-free, since each subdivided transfer is taxed, based on the appraised transfer of assets. This is a significant disadvantage for real estate investors.

An LLC is usually the best manner to hold real estate investment property. An LLC is essentially a hybrid of a Florida corporation and partnership. I always advise my clients to make sure the entity has more than one member so that it is not considered a “disregarded entity” in the eyes of the IRS and thus providing a shield from liability. In the event of any lawsuit or judgment, only the LLC can be sued, and liability cannot pass through to its members. With two or more members, the creditors of an individual member cannot reach the assets of the LLC to satisfy any individual judgment against the individual member.

Drafting the operating agreement of the LLC is crucial so that the understanding of the parties is set forth in writing and proper ownership is reflected. While the State of Florida requires that the manager(s) be publicly disclosed when filing for the LLC, the members are not necessarily disclosed, assuming an unrelated third party is appointed as the manager and as such are not made public. This privacy element appeals to many real estate investors.

LLCs carry may other advantages, like pass-through taxation benefits, so that the company is not subject to double tax but rather the distributions are only taxable to the individual members at their individual tax rates.

If you are looking to purchase real estate in South Florida, don’t go it alone. At the Law Offices of Jacqueline A. Salcines, PA, Attorney Salcines, Esq., holds a dual degree in both accounting and law. We can assist not only with providing tax advice but also with your entity formation and the entire real estate purchase. Call 305.669.5280 today to see how we can best assist you.

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Tags: , , Last modified: June 7, 2021