What are the advantages of using an LLC to buy a condo in NYC?
Using a limited liability company, or LLC, to buy a condominium in New York City offers privacy, tax advantages, and legal protections.
“It has been the preferred approach for sophisticated buyers and seasoned investors for years, but now has become commonplace for all types of buyers,” says James Woods, Esq., managing partner at Woods Lonergan PLLC, a Manhattan-based law firm that concentrates on real estate and in particular, buyers, sellers, and condo and cooperative board representation.
“Unless you are buying what is going to be your primary residence, it is a no brainer,” Woods says. Common scenarios involve a condo being used as a pied-à-terre or an investment property—a place you are planning to rent out.
When someone is making a purchase for their primary residence, there are other factors that need to be considered, including mortgage financing options and primary residence tax consequences. Lenders typically have more flexible and favorable lending terms for a buyer who plans to use their apartment as their primary residence. Most lenders tend to charge higher interest rates and/or may require a larger down payment when financing a purchase by an LLC that presumably will be used for investment purposes.
Your personal assets are protected
An LLC can also be thought of as a shield, protecting you personally from lawsuits, says Andreas E. Christou, an associate attorney at Woods Lonergan.
“An LLC is a legal entity that protects its members from personal exposure that could potentially arise from owning the apartment,” Christou explains. “If you own something through an LLC and get sued, absent certain limited circumstances, the person suing you is barred from going after your personal assets and is limited to the assets of the LLC.”
You get the benefit of corporate protection along with personal tax advantages
“A standard corporation is usually taxed twice on both the corporate income and dividends while an LLC is only taxed once on a personal tax return,” Woods explains. “Owners get the protections of a corporation without the burden of double taxation.”
When you hold your condo in an LLC, which is structured as a pass-through entity, it is taxed more like a sole proprietorship or partnership. There would be no dividends, so any profits or losses would flow down to you personally and would be treated as a profit or loss on your personal tax return, Woods says.
You can stay anonymous as a buyer
The privacy conferred by an LLC is another one of its advantages. Originally used as a strategy by luxury buyers and celebrities seeking to keep their name and assets out of the public record, using an LLC is now a go-to move for a wider range of buyers who wish to keep their identity private or who wish to purchase real estate as a business or investment purpose.
While buyers using an LLC are required to provide a tax identification number, this does not reveal the identity of the buyer (or multiple buyers, as the case may be) to the public.
International buyers of NYC condos frequently use LLCs for acquisitions—and establishing a tax ID number is “a hurdle, but usually one that can be easily cleared,” Woods says. Because an LLC is considered a distinct legal entity, it offers international buyers the opportunity to purchase real estate through an entity domiciled, or “housed” in the state the property is located.
An LLC also makes buying real estate as a group an easier transaction, says Christou.
If you have a group of investors, it allows these members to purchase as a single entity.
“You don’t need to reveal their names in the public record, and you don’t need to disclose the ownership interest of each investor,” he says. An LLC also enables investors to swap in and out of the entity with ease.
The real estate attorneys at Woods Lonergan have decades of experience successfully representing buyers and sellers in every type of transaction. "We mobilize quickly to guide you through every aspect of your purchase or sale, from home inspection to contract negotiations and closing," says managing partner James Woods. To learn more about Woods Lonergan or schedule a free 15 minute consultation, click here or call 212-684-2500.
Some considerations to keep in mind
There are some fees involved in setting up an LLC, including administrative fees, such as the $200 LLC filing fee for New York LLCs, and a publication requirement and associated fees as required by law to publish the LLC in certain newspapers. The fees typically range from approximately $750 to $900 in most instances. In addition, if you are using the LLC as a business venture with more than one member, it is advisable to have an attorney prepare the corporate governance documents. The LLC would incur legal fees in order to have an attorney draft an operating agreement for the newly formed LLC. The complexity and ownership structure of the LLC will dictate the details of the operating agreement.
As mentioned above, financing a real estate purchase with an LLC may not be the same as getting a mortgage for a primary residence. In addition to potentially paying a higher interest rate and put down a larger down payment, the lender is likely to require a guarantor on the loan.
Typically, traditional banks will only issue mortgages to individuals; but there are certainly financing options available for LLCs. A guarantor is almost always required because, lenders will want an avenue of recourse in the event of default. In the event an LLC closes down or no longer owns any assets, the lender will want to be sure that they can still go after an individual guarantor for any unpaid sums.
Your insurance costs will be higher than for a primary homeowner as well.
“An insurance company will see that this is not owner-occupied and expect that there will be more wear and tear,” Christou says.
It’s also important to know whether the condo building in which you are buying has any restrictions on using an LLC.
“Most condos do not have a formal approval process; however, it is advisable to confer with an attorney as the sale or transfer may be subject to the board’s right-of-first refusal and/or the condo may have disclosure or notice requirements,” Woods says. “Most buildings want to know the identity of the purchasers and who is going to reside in the apartment”
And looking ahead to the future: If a parent wants to gift the condo to their children, “it can be done easily inside the LLC,” Woods says. This transaction does not avoid a gift tax and an estate attorney should be consulted on this point; however, the transfer would be more time efficient and thereby should be less costly.
James Woods is a partner at Woods Lonergan PLLC and Andreas E. Christou is an associate with the firm. The firm Woods Lonergan PLLC represents New York City buyers, sellers, cooperative corporations, landlords, tenants, contractors, developers and management companies. To submit a question for this column, click here. For a free 15 minute legal consultation, call 212-684-2500 or send an email.