How to Create an LLC to Buy a 2nd Home
Forming a LLC to buy a second home may have tax advantages and reduce liability to either an individual owner or partners in the case of a mishap. Follow state laws and IRS guidelines closely when setting up the LLC and reporting taxes and any capital gains. Establish reasons for buying a second home and ensure a clear business purpose exists. Form an exit strategy to successfully dispose of the property.
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Things You'll Need
- Articles of organization
- IRS tax guidelines for LLCs
- Completed state paperwork
- Financing
- Exit strategy
- Proper insurance coverage
Instructions
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LLC formation and use
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1
Determine the reasons for buying a second home. Then list the percentage of time the home will be used for business reasons such as a bed and breakfast, a rental property, or short-term vacation property defined as "a home used by the owner 14 days or 10% of days rented in a year, [that will] garner some tax benefits versus personal needs," according to an article on the GMAC Real Estate website. Ensure the business entity is not just used for personal enjoyment.
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2
File articles of organization and sign an operating agreement to form the LLC. Submit the information to the Secretary of State in the state where the business operation will take place. Download the proper IRS forms that stipulate how "LLCs can only be classified as a corporation, partnership or sole proprietorship."
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3
Agree with any partners that a second home should have its own LLC. Price the necessary builders' risk insurance to use for fixing up a home, protecting renters and protecting those who walk on the premises for any reason. Purchase worker's compensation insurance for the LLC to cover any employees and subcontractors.
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4
Locate the property, negotiate the sale price and sign the name of the LLC on the purchase agreement. Set up a bank account under the LLC to make deposits and pay expenses. Set up a proper bookkeeping system and categorize the second home as an account. Or purchase a property under an individual name and then "quit claim" the property into a LLC, advises Jonathan Mednick on "Creative Real Estate Online." "When I sell it, the capital gains taxes hit my LLC, not me personally," Mednick writes. "That means if I profited $50K on a deal for the year, but all my combined expenses for everything under the LLC came to $45K, I only pay taxes on $5K."
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5
Develop an exit strategy for the second home even if it is a long-term strategy. Wise investors will determine why they are selling and then access cash accordingly. Know all the options for selling or exchanging a property.
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Tips & Warnings
Use mostly cash to purchase properties with a LLC since lenders normally offer more favorable rates to individuals than corporations.
Protect the LLC's cash flow.
Understand there are restrictions to the types of entities that can form LLCs.
Operating LLCs across state lines may incur administrative costs in each state where the LLC is in operation.
