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Read This If You Own A LLC In Delaware Holding Real Estate Investments

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LLCs In Delaware, With Real Estate Holdings, Face New Rules

THE DELAWARE LIMITED LIABILITY COMPANY ACT (DLLCA)
It provides a flexible and tax-friendly structure for holding real estate.
Half of all public companies and 60-percent of Fortune 500 companies are incorporated as Delaware LLCs without having a physical address or assets located there.
ADVANTAGES
All LLCs are treated as partnerships for tax purposes. All members (owners) get the benefit of pass-through income, which is only subject to tax (federal) at the individual partner level.
LLC members do not pay tax at the entity level.
It creates a legal separation between personal assets, debts, and liabilities (members) and the LLC
Owners are protected against legal liabilities, losses, and claims against the LLC, and cannot lose any personal assets.
IMPORTANT: Delaware LLCs are not required to publicly list the names and addresses of its owners.

According bpbcpa.com. The state of Delaware recently made amendments to the law, and this can have significant consequences on lending agreements and legal liabilities for Delaware LLCs.

 

 

Critical Changes To DLLCA

  1. Now existing Delaware LLCs can divide themselves into two or more separate LLCs and allocate their partnership interests, assets and liabilities among the resultant LLCs without any tax consequences.

There are many reasons why this can be beneficial:

  • If the LLC wishes to reorganize or facilitate a spin-off or sale without dissolving the original LLC or requiring a legal transfer or distribution of assets, rights, properties, and related liabilities.
  • After such a division the LLC can stop existing, or it can become a subsequent LLC

Beware: Such divisions of existing entities can result in state and local transfer taxes depending on the location of the assets.

 

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Tax Planning for U.S. Real Estate Investors

Procedures And Requirements

  • A majority of the LLCs members must approve and adopt a plan of division.
  • It must detail how assets and liabilities will be allocated among the subsequent LLCs.
  • It does not have to file these documents with the state.
  • It is meant for creditors and lenders to identify and pursue the correct subsequent LLCs to which their original claims have been assigned.
  1. Now Delaware LLCs can form protected and registered series LLCs starting after August 1st,

Background:

It has been established for more than twenty years that Delaware LLCs are permitted to series of members ( or various series), managers, interests, and assets to shield the assets from creditor’s claims against the debts, obligations and liabilities of those LLCs or their other LLC series. Of course, lenders were not keen to lend to a series. Series were not recognized as registered organizations by the UCC (Uniform Commercial Code), while competing state laws made it tough for lenders to entirely secure their interests in specific series, which meant that creditors lacked the required leverage they needed to seize collateral in the event of a default.

 

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New Amendments

Entities in Delaware can continue to form protected series with internal shields that limit the liability of the LLCs or other series LLCs. They can also create a registered series of members, managers, limited liability company interests or assets of an LLC,  which will now be legally recognized by the UCC.  Hence this clarifies that a creditor’s security interest in the relevant collateral of a registered series can be perfected; Delaware will serve as the jurisdiction of the organization and perfection filing.

Also, registered series LLCs can convert to protected series LLCs and vice versa; however, while a registered series can merge into one or more registered series of the same LLC to combine assets and liability of the two series, a protected series cannot take this course.

It is incumbent upon LLCs to engage the very best accounting professionals in their strategic planning to benefit from the continued viability for taxpayers to hold and own real estate in Delaware.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intended for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services.  This article cannot serve as a substitute for such professional services or advice.  Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation.  This article is subject to change at any time and for any reason.

Contact us for more info about tax strategies for Real Estate Investments. 

Like this article? Join our Real Estate Tax Linkedin Group: U.S. Real Estate Tax Intelligence

 

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Fulton Abraham Sánchez, CPA I am Certified Public Accountant, specialized in Tax Planning & Offshore Strategies for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution. You can email me fa@fascpaconsultants.com and follow us on Facebook : FAS CPA & Consultants.

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