Tax Smart Real Estate Investors Podcast

Episode 311: LLC Myth-Busters: Is Your Real Estate Really Protected?
Date: February 7, 2025
Hosts: Tom Wheelwright, Ryan, plus guest commentary

Episode Overview

This episode dispels common myths and misconceptions about using LLCs (Limited Liability Companies) for real estate investment. Tom and Ryan provide a clear breakdown of how LLCs function in terms of asset protection, tax treatment, and entity structuring. They discuss best practices, common pitfalls, detailed entity layering (with holding companies and estate planning), and address listener confusion about tax savings and legal protection. The episode also references related episodes for deeper dives into legal aspects and S-corp specifics.

Key Discussion Points and Insights

1. LLCs: Buzzword or Building Block?

• Timestamp 01:44 – 02:36
• Tom highlights that "LLC" is a popular topic and source of confusion among new real estate investors.
• Main point: LLCs are primarily legal tools offering asset protection, not tax advantages.

“LLCs are primarily for asset protection… not necessarily for tax purposes, but to help protect you in the event of lawsuits or other liabilities.” – Tom Wheelwright (01:44)

2. Entity Types & Their Roles in Real Estate

• Timestamp 02:36 – 05:14
• Ryan explains differences between entity types:
  • LLC: Most common for holding real estate. Can be a single-member (disregarded for tax) or multi-member (taxed as partnership).
  • S Corporation: Suited for active businesses (realtors, contractors), but should be avoided for holding rental real estate due to tax complications on restructuring or asset removal.
  • C Corporation: Rarely used for standard real estate holdings; more for large ventures or sales.

“If you put rentals in an S corporation… if you need to remove the property, it could trigger a sale... and that occurs even if you’re just moving it to another entity you own.” – Tom Wheelwright (04:34)

3. Layered Entity Structures: LLCs, Holding Companies, and Trusts

• Timestamp 07:08 – 11:22
• Ryan illustrates a common structure using three rental properties (each in its own state):
  • Base: Each property in its own state-specific LLC.
  • Middle Layer: These LLCs are owned 100% by a holding company (often a Wyoming LLC for privacy and asset protection).
  • Top Layer: The holding company is owned by a revocable living trust (for estate planning and avoiding probate).

“The point is that every single property is in an LLC that’s in and registered with that state.” – Ryan (07:57)
“Revocable living trust… that does is it helps you skip probate… administered to beneficiaries in a much more quicker process and less costly.” – Tom Wheelwright (12:15)

• Single/Married Note: If you’re married and use a joint revocable trust, you don’t need a partnership tax return.

4. Do You Need All These Entities?

• Timestamp 14:23 – 15:27
• Tom and Ryan emphasize: You don’t need an LLC to own a rental property. You may choose to own property in your own name and use umbrella insurance for liability, but this may not match LLC protection.

“You do not need an LLC. It may be often recommended... but you can absolutely own a property in your personal name.” – Tom Wheelwright (15:01)

5. Myth-Busting: LLCs and Taxes

• Timestamp 15:27 – 17:09
• LLCs do not provide automatic tax savings. The IRS taxes real estate income the same, whether held in an LLC or your personal name.
• Common misconception: An LLC magically makes all expenses deductible business costs.
• Clear distinction is made between legal structure and tax status.

“Creating some sort of entity… does not automatically create a business. The IRS does not see it that way.” – Ryan (16:38)

6. Proper Money Management and the ‘Corporate Veil’

• Timestamp 17:09 – 19:34
• Importance of NOT commingling personal and business funds to maintain the LLC’s legal protection.
• If you want to use LLC funds personally, record it as a formal distribution.
• Myth dispelled: Withdrawing from your LLC’s account (once taxed) is not a new taxable event, unless in a C or S-Corp context.

“The corporate veil is like the invisible wall between you and your LLC that protects you… It's not your personal piggy bank.” – Tom Wheelwright (17:19)
“If you have money, cash in your business bank account, that money has already been taxed.” – Ryan (18:29)

7. Transferring Property into an LLC & The 'Due on Sale' Clause

• Timestamp 19:34 – 21:34
• Common situation: Financing limits force purchases in your personal name; you later transfer the property to your LLC by "quit claim" deed.
• Banks could call the loan due (“due on sale” clause), but this is rare unless payments default.

“I’ve never seen it actually happen… unless you default on your payments… but that’s not to say it can’t happen.” – Tom Wheelwright (20:41)

8. Final Recap and Related Resources

• Episode 267: Deep dive on S Corps
• Episode 269: “The Cold Hard Truth About LLCs” with attorney Ron Rody
• Facebook group: TaxPoint Investors, for further questions and community support.

“Big picture, yeah… LLC just in general, no tax savings. They are primarily for legal protection.” – Ryan (21:34)

Notable Quotes & Memorable Moments

• On perceived ‘legitimacy’:
  “LLC is just something that seems so sexy. It’s like a sexy word that everybody makes you feel legit, right?” – Tom Wheelwright (01:44)

• On S Corps and rentals:
  “If you have one in there right now, don’t panic… just know you just want to avoid it going forward.” – Tom Wheelwright (05:49)

• On simplifying tax myth:
  “If something is a business expense, whether you have an LLC, an S Corp, a C Corp, or not—it’s business or it’s not, regardless of the entity structure you have.” – Ryan (17:09)

• On the value of trusts:
  “With [a] revocable living trust, everything… is just administered to beneficiaries in a much quicker process and less costly.” – Tom Wheelwright (12:15)

Timestamps for Key Segments

| Timestamp | Segment Description | |-----------|--------------------------------------------------------| | 01:44 | Introduction to LLCs and the purpose of entity structuring | | 03:16 | Difference between LLC, S Corp, and C Corp | | 04:34 | Why S Corps are problematic for rentals | | 07:08 | Visualizing the ideal entity structure (state LLCs, holding company, trust) | | 12:15 | How trusts help avoid probate and ease inheritance | | 14:23 | LLC is not required for tax or asset protection | | 15:27 | Myth: LLC creates tax savings automatically | | 17:09 | Importance of not commingling funds; distributions | | 18:29 | Withdrawing cash not a taxable event for LLCs | | 19:34 | Transferring property, due on sale clause explained |

Conclusion

Bottom Line:

• LLCs are primarily legal protection tools, not tax-saving vehicles.
• Avoid putting rental properties in S Corps due to harsh tax consequences for asset removal.
• A layered structure—property-level LLCs, a holding company, and optionally a revocable trust—is common but not mandatory.
• Meticulous separation of personal/business funds is critical to keeping LLC protection.
• An LLC does not turn your personal expenses into deductible business costs.
• Always consult professionals for legal and tax-specific questions tailored to your situation.

Further Learning:

• Episode 267 (“S Corps with Nathan Sosa”)
• Episode 269 (“LLC Legal Deep Dive with Ron Rody”)
• TaxPoint Investors Facebook group

Episode summary prepared for those seeking practical, actionable advice on real estate entity structuring and LLC realities without the fluff or misinformation found elsewhere.