JAMES C. KOVALESKI
James C. Kovaleski, Esq, is an associate attorney with OWM Law and Co-Chair of the Estate Planning Practice Group. Mr. Kovaleski concentrates his practice in the Estate Planning and Administration, Elder Law, Tax Law, Business Planning and Real Estate Transaction areas.
Mr. Kovaleski is active in the Phoenixville area, working out of OWM Law’s Phoenixville office, serving as a Phoenixville Council member, as well as serving on the Boards of various local non-profits. He lives in Phoenixville with his wife and daughter.
Click the Facebook link and “Like” us on Facebook for current OWM news and information.
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.
OWNERSHIP OF RENTAL PROPERTY
Many individuals may already own or are considering investing in a rental property. One of the main issues to be addressed when considering purchasing and operating a rental property is who will own that property. There are two (2) general ways of owning a property: (1) as an individual or as multiple individuals in the form of a partnership; or (2) through an entity such as a corporation, limited liability company or limited partnership. There are pros and cons to ownership in either format which should be considered prior to purchasing the rental property.
Arguably, the easiest way to own a rental property is as an individual where one person purchases the property and rents it. The benefits to this type of ownership is that no additional time or money needs to be investing in forming an entity to own the real property which could delay, albeit only for a few weeks, closing on the property. Another potential benefit is that it has been my experience that financial institutions may more readily lend money to individuals rather than newly-formed entities. However, these benefits and any other potential benefits of ownership of a rental property individually should be weighed against what I would deem the biggest negative factor which is unlimited personal liability. If an individual owns a rental property and someone is injured on that rental property, that individual could be held liable for any resulting damages.
An alternative to owning rental property as an individual is to own it in a corporate entity, often times a limited liability company or limited partnership. The biggest benefit of owning a rental property through an entity is the potential limitation of personal liability. In most instances, the individual owner of the entity that owns the rental property will not be held personally liable for issues occurring on the rental property. The biggest negative factors are that, by owning the property through an entity, there is a need to form that entity and, potentially, file tax returns for that entity which will result in some initial and ongoing costs.
Another potential negative issue would be the restrictions on lending to an entity that may be faced. It is possible that financial institutions will not loan to an entity and, if they do, they may charge an increased interest rate. These costs must be weighed against the benefits of ownership in an entity including, but not limited to, the potential for personal liability protection.
If the decision is made to own the property in an entity, then consideration should be given to the type of entity selected. This is often a tax-driven decision and, in my experience, the entity is either a limited liability company or a limited partnership. I have seen limited liability companies used for smaller real estate holdings, with limited partnerships used for larger real estate holdings. One difference between the two entities is whether or not the capital stock and franchise tax applies to that entity. In the case of a limited partnership, the capital stock and franchise tax can be reduced depending upon the ownership structure of that limited partnership.
Given all the factors to consider when purchasing a rental property, prospective purchasers should discuss the above issues and any other which would apply with their accountant and attorney to help guide them in make the most appropriate decision in their case.
If you would care to discuss the above in detail, please call me at 610-323-2800 or email me at email@example.com. Also, please watch OWM's February 2015 Legal Talk program regarding Investing in Real Estate on our website here.
Kathleen M. Martin, Esq., presenter at Pennsylvania Bar Institute's Estate and Elder Law Symposium on Essentials of Medicaidon on 2/11/15 in Philadelphia, PA and on 2/17/15 in Mechanicsburg, PA (contact PBI at 1-800-247-4724).
David A. Megay, Esq., speaking at Chester County Night School Seminars (6:30p.m.-8:30p.m.) at Owen J. Roberts High School, Pottstown, PA, on 3/25/15 entitled "Starting Your Own Business" and on 4/29/15 entitled "Buying and Selling Real Estate in PA" (contact Chester County Night School at 610-692-1964 or online at www.chestercountynightschool.org).
Kathleen M. Martin, Esq., speaking at Chester County Night School Seminars at West Chester B. Reed Henderson High School, West Chester, PA, on 3/25/15 entitled "Elder Law Issues" ;and at Owen J. Roberts High School, Pottstown, PA, on 4/8/15 entitled "Elder Law Issues"; and at Owen J. Roberts High School, Pottstown, PA, on 4/22/15 entitled "Beyond the Simple Will" (contact Chester County Night School at 610-692-1964 or online at www.chestercountynightschool.org).
Watch Legal Talk, brought to you by OWM, on PCTV, Tuesdays at 8:30 on Channel 28, and Thursdays at 9:30 p.m. on Channel 98, or on our website here.
Read Legal Ease every first and third Sunday in the Pottstown Mercury.