As investors grow their net lease portfolios, they may start out owning properties in their own name, as a sole proprietorship or partnerships. At some point though, most NNN investors will migrate their assets into LLCs.
If an investor purchases a net lease property as an individual, their assets remain exposed to potential liabilities that may arise during the course of ownership, as well as in the case of foreclosure, debt collection, bankruptcy or a lawsuit.
Typically, to avoid personal liability, triple net lease investors form a corporation or a non-LLC partnership. However, in a partnership, each partner is jointly and severally liable for all partners’ debts and obligations, and a corporation is taxed onerously. Under current tax law, for C-corporations and S- corporations, the flat rate of tax is almost the same – 20%. Yet, choosing a corporation means investors will get taxed twice on the gains at time of sale of property – once as a corporation within which the gain is generated, and the second time in a personal capacity as a recipient of the gain.
Under an LLC, however, NNN investor losses are limited to their investment within the LLC structure. Thus, personal assets are sheltered. This said, for taxation purposes, an LLC is not a tax entity separate from its members. Income, expenses and taxes generated within an LLC “pass-through” to its members. The pass-through tax impact of an LLC can further vary depending on whether the investor’s LLC reports taxes as a partnership, corporation or sole proprietorship. In addition, members of an LLC also enjoy the QBI – an additional 20% tax deduction – only allowed to investors who are part of a pass-through entity.
Essentially, the most common reasons NNN investors form an LLC are to access to more capital (e.g. use an Investment LLC), specific tax and wealth transfer benefits such as for foreign national investors, asset protection, separation of assets (e.g. use a Series LLC) and liability mitigation etc.
Your expert advisors at the Triple Net Investment Group, led by Robert Gamzeh, guide triple net lease investors into profitable investments, structuring sales and purchases to accommodate a variety of tax-efficient holding structures.
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