Holding Companies
A holding company protects an investor’s assets by placing everything related to the ownership of a commercial real estate asset under its name instead of the investor’s.
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Many investors opt to reduce their risk profiles by isolating specific properties from their other assets through the use of a holding company — most commonly in the form of a limited liability company, or LLC. In practice, the purpose of a holding company is to protect an investor’s assets by placing everything related to the ownership of a commercial real estate asset under its name instead of the investor’s. This typically includes important ownership and financing documents such as the deed, contract, and any mortgages against the asset.
Why Use a Holding Company?
Holding companies can be extremely beneficial for investors when it comes to liability. In most cases, any legal actions taken regarding events that occurred on the property would be against the owner of said property. For instance, should someone slip and fall while on the grounds of a self-storage facility, they may choose to file a lawsuit against the owner of the property. Upon winning such a lawsuit, the owner would need to compensate the victim. With that in mind, many savvy investors utilize a holding company for ownership of commercial property — effectively meaning that any payment would have to come from the holding company — not out of the personal wealth of the investor.
Beyond liability concerns, holding companies also present some tax advantages. For starters, much like with liability, it is significantly easier to separate business from personal finances when it comes to filing taxes when holding a commercial real estate asset under a separate legal entity. Additionally, using a holding company can make investors eligible for significant business income tax deductions. While many aspects of commercial real estate ownership — asset depreciation, property taxes, and insurance notwithstanding — are also tax deductible, most investors make sure to reap all available tax benefits of owning commercial properties.
Related Questions
What is a holding company?
A holding company is a legal entity that is used to isolate specific properties from any other assets. Most commonly found in the form of a limited liability company (LLC), a holding company protects an investor’s assets by placing everything of importance regarding the ownership of a commercial real estate asset under its name instead of the investor’s. This typically includes all of the asset’s relevant ownership and financing documents such as the deed, contract, and any active mortgages.
The purpose of a holding company is to mitigate risk by isolating the investor's assets from any legal actions that may be pursued relating to a property. Additionally, holding companies can also present investors with some interesting tax benefits such as separating business finances from personal finances when filing taxes, as well as a few significant business income tax deductions in some states.
What are the advantages of forming a holding company?
Forming a holding company can provide a number of advantages for commercial real estate investors. Holding companies help reduce risk and potential liabilities, as well as make financial reporting and taxation easier. Additionally, holding companies can provide investors with some interesting tax benefits, such as asset depreciation, property taxes, and insurance deductions. For more information, please see Holding Companies Explained and Holding Companies in Commercial Real Estate.
What are the disadvantages of forming a holding company?
The main disadvantage of forming a holding company is the cost associated with setting up and maintaining the company. Depending on the jurisdiction, there may be filing fees, annual fees, and other costs associated with forming and maintaining the company. Additionally, there may be tax implications associated with forming a holding company, as the company may be subject to corporate taxes. Finally, there may be additional paperwork and administrative tasks associated with forming and maintaining a holding company, which can be time consuming and costly.
Source: Holding Companies Explained, Holding Companies in Commercial Real Estate
What types of assets can a holding company own?
A holding company can own a variety of assets, including stocks, bonds, real estate, and other investments. Holding companies are most commonly used to own commercial real estate assets, such as apartment buildings, office buildings, and retail centers. This is because holding companies can provide investors with liability protection and tax benefits. For more information on holding companies and their purpose, please see this article from Apartment Loans.
What are the tax implications of forming a holding company?
Forming a holding company can present investors with some interesting tax benefits. For starters, holding a commercial real estate asset under a separate legal entity makes separating business finances from personal finances substantially easier when it comes to filing taxes. Additionally, there are a few significant business income tax deductions investors may be able to reap by operating via an LLC in some states — adding to the plethora of deductions commercial real estate property typically owners enjoy such as asset depreciation, property taxes, and insurance.
For more information on the tax implications of forming a holding company, please refer to the following resources:
What are the legal requirements for forming a holding company?
The legal requirements for forming a holding company vary by state, but typically include filing articles of organization with the state, obtaining an employer identification number (EIN) from the IRS, and creating an operating agreement. Additionally, depending on the state, you may need to register the LLC with the state's department of taxation and/or the secretary of state.
For more information, please refer to the following sources:
- How to Form an LLC in Your State from Incfile
- Form an LLC from the Small Business Administration