If you are going to get started in investing in real estate, you might want to know your options. Most newcomers to real estate simply purchase a property in their own name. But there are many more possibilities.

Why should you consider not using your own name? Well, when you purchase a property in your own name it is the name as having a “sole proprietorship”. When you have as sole proprietorship, you are liable for all debts related to the property as well as any lawsuits that arise. If someone gets injured while on the property and decide that it is due to negligence then you can be sued and you will be personally responsible, with all of your finances and possessions at risk. Your income will be listed on a Schedule C when you file income tax and you will be charged a self-employment income tax.

You know you don’t want to get sued, so the best option is to put your real estate in a legal structure that will protect you and that will also let you expense costs. That doesn’t mean you should file a corporation and use it to manage your real estate because those are generally subject to double-taxation. The corporation will have to pay tax once and you will have to pay tax when the corporation pays you. If you are dealing with millions of dollars in properties you might want to go this route, but if you are starting out in real estate, then you might want to look at another option.

That option is the LLC or LLP, or “Limited Liability Corporation” and “Limited Liability Partnership”. LLC’s don’t pay taxes on real estate in most cases so this means that you can avoid double taxation during ongoing operations and if you sell out, usually you don’t have to pay double taxation. The “limited liability” means that you are protected if any lawsuits arise. If the property generates a lawsuit, the only one who will have to respond is the LLC, which will protect the rest of your assets.

LLC’s can mail out checks to owners at regular intervals and hold back a little for maintenance, so you really aren’t losing any convenience by adopting an LLC. Now I’m not a lawyer or an accountant and I don’t know all of the ins and outs of all of the laws and tax rules related to an LLC. But I do know that I personally use an LLC for my real estate. So do your homework, contact your accountant and file an LLC. If you are skilled with keeping books maybe you can handle the paperwork on your own. Consult a lawyer if you need to. There will be some slightly higher costs to get started, but wouldn’t you rather pay a bit more and have peace of mind than be in hot water down the road?

Written for Richbitchitch.com by Rick Hyland