An estimated 37% of Manhattan properties are owned by LLCs (limited liability corporations). As defined on New York State's LLC website, "An LLC is an unincorporated business organization of one or more persons who have limited liability for the contractual obligations and other liabilities of the business." In essence, an LLC is a business structure that combines "corporation-style limited liability with partnership-style flexibility," making it an ideal structure for many small businesses and a particularly attractive structure for real estate investors.
This article examines when, why, and how to buy a property with an LLC, explores why the practice is sometimes viewed as controversial, and one of the key benefits of buying with an LLC (anonymity) may soon disappear in New York State.
This article examines when, why, and how to buy a property with an LLC, explores why the practice is sometimes viewed as controversial, and one of the key benefits of buying with an LLC (anonymity) may soon disappear in New York State.
When to Buy a Property with an LLC
There are two primary reasons to buy a property with an LLC. The first is privacy. If you're a celebrity or someone of notoriety, closing a deal under an LLC can help you buy a property without being featured in Notable Sales or any similar reports. However, most properties bought and sold as LLCs don't belong to celebrities but rather to investors (and, in some cases, individual owners) who want to take advantage of the protections and tax advantages associated with purchasing a property with an LLC.
Why Buy a Property with an LLC
There are several advantages associated with buying a property under an LLC, including the ability to:
• Protect your personal assets: Whether you own one unit or hundreds of units, if you purchase a residential property using an LLC structure, you'll always be able to keep your personal finances separate from your real estate investments. In theory, if you lose your property, the loss won't impact assets held outside your LLC.
• Avoid paying double tax: There are also significant tax benefits associated with purchasing properties under an LLC structure. Most importantly, an LLC helps owners avoid double taxation (i.e., paying taxes on a business and personal level).
• Easily invest with business partners: An LLC structure can also make it easier to buy a property with friends or business partners.
• Avoid paying double tax: There are also significant tax benefits associated with purchasing properties under an LLC structure. Most importantly, an LLC helps owners avoid double taxation (i.e., paying taxes on a business and personal level).
• Easily invest with business partners: An LLC structure can also make it easier to buy a property with friends or business partners.
How to Buy a Property Under an LLC
Buying a property with an LLC is a fairly straightforward process that only differs slightly from buying a property as an individual. The following are the main steps involved in the process:
• Establish an LLC: If you don't already have an LLC or want to create a new one for a specific real estate purchase or series of purchases, the first step is to establish an LLC. Visit New York State's Forming a Limited Liability Company in New York State site to learn more about the process. One important consideration is that any information included in the "Articles of Organization for a Domestic Limited Liability Company" form will eventually be made available in public databases. However, for a small fee, you can work with a registered agent to avoid having your name or address included in any public filings.
• Adopt an operating agreement: If you are forming an LLC, you'll also need an operating agreement, which is essentially a set of bylaws that will determine the operation of your LLC. An operating agreement is particularly important if you plan to establish an LLC with other investors.
• Seek financing: Since lenders know that LLCs can't be held personally liable for a corporation's debt, financing can be more challenging. Some lenders will only work with LLCs if the buyer agrees in advance to also put their assets on the line if a debt is incurred.
• Find an agent and start making offers: Once you've established your LLC, adopted an operating agreement, and secured financing, the following steps are similar to any other real estate purchase (i.e., you need to find an agent, start looking at properties, and eventually make an offer). One possible difference is that some sellers and buildings will be more amendable to LLCs than others. For example, if you're buying a sponsor unit in a new construction condo, you'll be unlikely to run into obstacles. By contrast, the welcome mat may or may not be rolled out if you attempt to buy a unit in a small coop, since many coop boards are invested in selling to individuals, not corporations.
• Prepare for additional scrutiny during the closing process: When buying with an LLC, you don't need to reveal your name. Your agent will present the deal as coming from an LLC. That said, if you're buying anything over $3 million in Manhattan or $1.5 million in Brooklyn, expect additional scrutiny, especially during the title search.
• Adopt an operating agreement: If you are forming an LLC, you'll also need an operating agreement, which is essentially a set of bylaws that will determine the operation of your LLC. An operating agreement is particularly important if you plan to establish an LLC with other investors.
• Seek financing: Since lenders know that LLCs can't be held personally liable for a corporation's debt, financing can be more challenging. Some lenders will only work with LLCs if the buyer agrees in advance to also put their assets on the line if a debt is incurred.
• Find an agent and start making offers: Once you've established your LLC, adopted an operating agreement, and secured financing, the following steps are similar to any other real estate purchase (i.e., you need to find an agent, start looking at properties, and eventually make an offer). One possible difference is that some sellers and buildings will be more amendable to LLCs than others. For example, if you're buying a sponsor unit in a new construction condo, you'll be unlikely to run into obstacles. By contrast, the welcome mat may or may not be rolled out if you attempt to buy a unit in a small coop, since many coop boards are invested in selling to individuals, not corporations.
• Prepare for additional scrutiny during the closing process: When buying with an LLC, you don't need to reveal your name. Your agent will present the deal as coming from an LLC. That said, if you're buying anything over $3 million in Manhattan or $1.5 million in Brooklyn, expect additional scrutiny, especially during the title search.
Why LLCs Are Controversial
Despite being a common practice, LLC ownership of residential properties continues to attract a fair share of critics. In recent years, even Secretary of the Treasurer Janet Yellen has taken a swing at LLC-owned properties. In an uncharacteristically sharp critique, Yellen once claimed that "sometimes the only thing these luxury properties are home to are ill-gotten gains – they're money laundromats on the 81st floor." In some respects, Yellen is correct—particularly on the luxury side of the market, some properties are purchased with LLCs to help an owner (in many cases, a buyer based in a more volatile economy) move a portion of their wealth to the United States. Given the strong returns delivered on New York City real estate, there is no question that at least some LLC-owned condos in the city, including many located in Billionaires' Row, are primarily investment vehicles. However, there is now a high chance that we will soon know who is purchasing LLC-owned condos in New York City and why.
Under the New York LLC Transparency Act (NYLTA), which passed both houses of the New York State Legislature in mid-2023 and is only waiting for Governor Kathy Hochul’s signature, it will no longer be possible to conceal one’s identity by purchasing with an LLC. Assuming Governor Hochul does sign off on the act, which is expected, by late 2024 to early 2025, all new and existing LLCs in New York State will be obligated to list all their owners. While the goal is to prevent the anonymous use of LLCs for activities such as money laundering, fraud, and tax evasion, there could be broader implications. It is also possible, for example, that fewer buyers will choose to purchase with an LLC.
Although purchasing residential units with an LLC can be problematic, if you live in a building with many LLC-owned units, don't assume your building is a haven for "money laundromats." Most LLC-owned units are owned by the building's original sponsor—in condos, this is typically the developer, and in coops, this is the investor who helped turn the building from a rental into a coop.
Contributing Writer
Cait Etherington
Cait Etherington has over twenty years of experience working as a journalist and communications consultant. Her articles and reviews have been published in newspapers and magazines across the United States and internationally. An experienced financial writer, Cait is committed to exposing the human side of stories about contemporary business, banking and workplace relations. She also enjoys writing about trends, lifestyles and real estate in New York City where she lives with her family in a cozy apartment on the twentieth floor of a Manhattan high rise.
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