Real Estate Investment Partnership

UPDATED: Sep 30, 2022

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Real Estate Investment Partnership

I am thinking of getting into a real estate investment partnership with a family
member. Is LLC the way to go to set up this partnership? Also does it need to be
set up in same state as I am living or the property I invest? What are if any tax
implications I need to keep in mind setting up this entity?

Asked on May 1, 2017 under Business Law, New Jersey


SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 5 years ago | Contributor

An LLC is an excellent choice, and one very commonly adopted by landlords or real estate investors or developers. (E.g. I am a NJ landlord-tenant attorney: most of my clients are LLCs.) Having an LLC will protect your personal assets from most (but not all; no protection is perfect) business-related debts or obligations, including court judgments (e.g. if the business is sued). A further refinement is to set up a separate LLC for each property you buy/own; that way, you never have more than one propertly legally at stake (the separate LLCs will operate as "firewalls" to protect property A from property B's liability)--this, too is very common. (I have one client who has 28 properties--and 28 LLCs.)
You can legally set it up anywhere--every state's LLCs are recognized by every other state's--but I'd recommend doing it in the state in which you own property: if you are sued (or, for that matter, sue someone else), it's most likely to be there (since any suits will probably come out of the property and its ownership), so its slightly simpler if the state in which you may be in court is the state of LLC formation, since that state will be fully familiar with all the laws relating to the formation of the LLC. This isn't a big consideration, but since there really is little to chose from between the different states (the laws are all very similar), it probably tips the balance in favor of the state in which the property exists.
Taxes: select "partnership" or "pass through" tax treatment. That way, there is no separate double "corporate" taxation. Instead, profits and losses drop directly to the members'  (owners) own income and are taxed with the rest of their income (e.g. profit adds to income; but losses detract from income and reduce taxes owed).

IMPORTANT NOTICE: The Answer(s) provided above are for general information only. The attorney providing the answer was not serving as the attorney for the person submitting the question or in any attorney-client relationship with such person. Laws may vary from state to state, and sometimes change. Tiny variations in the facts, or a fact not set forth in a question, often can change a legal outcome or an attorney's conclusion. Although has verified the attorney was admitted to practice law in at least one jurisdiction, he or she may not be authorized to practice law in the jurisdiction referred to in the question, nor is he or she necessarily experienced in the area of the law involved. Unlike the information in the Answer(s) above, upon which you should NOT rely, for personal advice you can rely upon we suggest you retain an attorney to represent you.

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