How to Set Up an LLC to Buy Real Estate in NYC

The idea of purchasing an NYC home through a Limited Liability Company (LLC) is something most investors will be familiar with. Rather than owning the business yourself, you’ll be holding it indirectly through the guise of a corporation. This can have significant advantages for privacy, liability insurance, and tax purposes. However, it also adds an extra step to the buying process, and not every building in NYC allows prospective buyers to purchase using an LLC. Nevertheless, it remains a popular buying method for many astute investors.

Here, we look at everything you need to know about purchasing an NYC home through an LLC. An LLC may not suit everyone, but it can be the perfect fit for some.

What is an LLC?

An LLC combines a corporation, sole proprietorship, and partnership into a separate and distinct legal entity. Each LLC gets its tax identification number, can open a checking account, and run a business under its name. Typically formed for a business, they can also have a lot of advantages for property investors. For instance:

• Personal Asset Protection – An LLC provides owners with the same level of liability protection as a business. In this case, you will not be personally liable for any debts incurred by your LLC through a lawsuit. A huge benefit for investors with a net worth in significant excess of the property’s value.
• Privacy – Purchasing through an LLC shields the owner’s name from the public eye. Since property ownership is a matter of public record, this can be ideal for buyers who want to maintain anonymity.
• Pass-Through Taxation – LLCs provide their owners with pass-through taxation. This eliminates double taxation and means the LLC pays taxes on profits, but the owner does not. Note the LLC owner must still pay taxes on their allocated share of profits.
• Easier to Invest with Partners – LLCs’ structure provides enormous flexibility as there is no minimum or maximum limit on the number of owners it can have. This makes it easy to invest with partners or bring in new investors as needed. LLC shares can also be sold whenever an investor wants to drop out.

Disadvantages of Buying with an LLC

However, they’re not without a few downsides as well. Below are some that you’ll want to consider beforehand.

• Cost – Setting up an LLC will cost you at least a few hundred dollars, and that’s before you add the legal expenses if working through an attorney. Get a firm understanding of the total costs ahead of time. Once you’ve set up your LLC, you’ll need to stay on top of annual LLC taxes, report fees, agent fees, and license renewal fees.
• Getting a Mortgage – Getting a mortgage while buying through an LLC can be difficult. Banks will, understandably, be concerned about liability and debt collection in the event of a default. Usually, the only way around this is if the borrower agrees to back the debt using their assets.
• You won’t be Eligible for Most loan Types – Buying through an LLC means you can’t tap into the many types of residential loans you otherwise could, such as FHA loans. You also can’t get a conventional loan through Fannie Mae or Freddie Mac.
• You’ll be giving up preferential Capital Gains treatment – Capital gains tax must be paid when you sell a property for more than you paid. Primary residences gain special treatment and don’t pay tax on the first $250,000 profit for single homeowners ($500,000 for married couples). Since any home purchased through an LLC is outed as an investment property, you will lose this special treatment.

How to Form an LLC in NYC

LLCs are relatively easy to form. You’ll need to file Articles of Organization with the New York Department of State, Division of Corporations. These articles will include:

• The name of your LLC
• New York County where located
• A New York-based address so the Secretary of State can mail any documents to you
• Signature of the LLCs organizer
• Name and address of the filer of the articles

You can do filing by mail or online. The nominal filing fee is $200. In addition, New York’s LLC law requires that you adopt a written operating agreement either before or within 90 days of filing your Articles of Organization. Doing so establishes the rights, powers, duties, liabilities, and obligations of the LLC and its members. Within 120 days of its Articles of Organization becoming effective, the LLC must publish a copy of these articles in two newspapers. Once published, each newspaper will send you an affidavit of publication which you must submit to the New York Department of State, Division of Corporations. The fee for filing this is $50.

Of course, you can also have your attorney handle all of this, but that will cost extra.

Is It Worth Forming an LLC?

There’s no straight answer to this. If you’re worried about asset protection, you could still get a degree of protection by purchasing liability insurance rather than forming an LLC. However, there may still be some policy limits that don’t provide as much protection as an LLC would. If one of your tenants throws a huge party where someone gets hurt and sues for damages, the LLC will protect your assets. Just be aware that in the case of bankruptcy, the level of protection is not so clear. A concept known as “piercing the corporate veil” can allow creditors to disregard the LLC and hold the owners responsible for any debts – something a bankruptcy judge would have to rule.

NYC investors must also be aware that not every building allows purchases through LLCs. It complicates the board’s ability to collect on unpaid monthly maintenance fees. They may also be worried about the owner not keeping to the building’s resale and subletting policies. Co-ops that allow purchasing through LLCs require the owner to sign an occupancy agreement and serve as a financial guarantor. This will add additional closing costs as the buyer must pay the legal fees for drafting these documents. While condos are less likely to have issues with purchases through LLCs, it’s still a good idea to get written confirmation on the building’s policy ahead of time.

LLC for International Buyers

Many foreign investors chose New York City real estate, a safe haven. Also, an appreciating dollar means there is the potential for capital gains. These investors face the same choices: holding the property in their name, a corporation, or an LLC. An S Corporation is off the table for foreigners. LLC has been used as a way to hide your identity. But, in 2018, the U.S. government required title companies to hand over the buyer’s identity for purchases of $3 million.

While an LLC provides liability protection, there is an added level of complexity regarding taxes. You need to check your home country’s tax laws to see if it makes sense to form an LLC. The IRS typically requires you to withhold taxes on your real estate business income under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). Including rents received and, ultimately, the proceeds from the sale of the property.

For a non-resident alien, you usually want to avoid direct ownership. One way to do this is to have an irrevocable foreign trust own a U.S. LLC. There are also estate tax reasons for a foreign investor to form an LLC.

Final Thoughts

LLCs can provide many advantages, such as privacy, asset protection, and tax benefits. They’re more likely to work for experienced investors paying all-cash than beginners in need of financing. But You must measure any advantages against the disadvantages of ongoing costs, difficulties with getting a mortgage, and other cons. Whatever you do, consult your business attorney and buyer’s agent to determine the best approach.