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Acquiring ownership of a rental home through purchase or transfer offers a property owner a source of income for as long as the property is active. Business formation is a popular topic for investors who are protecting their future and investments each year. This real estate holding company guide will introduce the concept of a placeholder company used in the housing industry.
While this page provides an overview for property investors, it is always recommended to review and understand local, federal and state laws as it pertains to personal or business investing scenarios. Circumstances for two average investors are likely to be very different.
A Holding Company Defined
A holding company is more than a registered business. It provides owners with a way to manage multiple investments using one name. The sole purpose of the company is to own assets or to hold investments that will earn or lose money each year. Some of the top real estate companies in the United States are actually holding companies. Some companies create operating companies although these are still holding corporations under the current tax laws.
Advantages of Starting Holding Companies
For real estate investors, personal loss can be an issue if a purchased property underperforms. Liability, personal or corporate, is a separate issue that can be a negative for some people who own real property. There are advantages to starting holding companies when compared to a sole proprietorship or a limited liability company.
1. Tax Incentives
2. Easy to Subsidize
3. Liability Protection
4. Simple to Expand
5. Voting Control
6. Leverage Financing
While there are advantages to a holding company, there can be disadvantages as well. The biggest negative to owning a holding company is the risk of higher taxation. A holding company must legally own 80 percent of its subsidiary company stock otherwise capital gains tax is owned on all revenue earned. This includes the sale of stocks, bonds, real estate or other holdings.
IRA Real Estate Option
One of the rules of purchasing a rental home with retirement funds is that the IRA will be the owner of the property and not the owner of the IRA account. Essentially, a new LLC is created for ownership of the property to ensure that all funds are carefully placed for long-term growth. This created LLC could be a holding company and is a popular form of ownership for housing industry investors who own one or more properties.
Guide to Financing Investment Property
The pros and cons of any legal business structure should always be reviewed prior to purchasing homes for sale. JWB provides a free investing guide on this page that includes how to purchase homes with a variety of retirement accounts. A person who wants to know how to earn higher returns while investing a 401K, 403b or similar account in real estate should download this complementary guide.