By forming a Limited Liability Corporation (LLC), family members can help provide affordable housing for people with disabilities. Many times the LLC has been combined with inheritances, financial gifts, and Special Needs Trusts. These LLCs finance the down payment for homes. The LLC members are people who primarily have a personal interest and less often an investment interest in the company. The goal of affordable, safe housing for specific individuals is the driving force.
The first step in this process is to compare the individual’s needs to his/her current budget. Analyzing the necessary funds needed for a mortgage, taxes, and insurance with the monthly income of the individual and any roommates must be included in planning. This determines how much house the LLC can afford or how much must be contributed to the LLC for the plan to work.
Typically, an LLC for an individual’s home is formed for people who have guardians. When a person has a guardian, he/she is unable to hold a mortgage in his/her own name, make informed consent, or enter contracts. Utilizing an LLC, allows a person with guardianship to benefit from homeownership with assistance by a family member, without putting the family member at the liability risk that comes from cosigning or assuming the mortgage themselves.
For most, purchasing a home for a family member through an LLC is not a money-making venture. It is a tool to accomplish the goal of providing safe, affordable housing for a loved one. There are instances when a silent partner joins this business arrangement in order to utilize the depreciation tax right off or to get resale equity in the future.
Property taxes. One of the drawbacks in forming an LLC to purchase a home is that the home is owned by an entity rather than an individual or family, and is therefore ineligible for homestead tax rates. This can cause a financial challenge as the monthly payment may be significantly higher with the escrow account needing more money to cover the taxes. Some families have assigned the person living in the home as a member of the LLC in order to claim homestead tax exemption but this has had very limited success. Much of the decision to be eligible for homestead tax exemption in these situations depends on the community the person lives in and working closely with local governments. Another consideration that must be made is that when an individual is a member of the LLC, they now have more than the allotted $2000 allowed for one to continue to be Medicaid eligible. It is important to contact an attorney who specializes in this type of law before forming an LLC.
Non-profit status. Most of the LLCs described above were formed to benefit a relative. The LLCs were formed without the benefits of non-profit status because the whole purpose of the company is to benefit a family member and not a group or community. But, that being said, a couple of families have achieved a non-profit status for their LLCs. The application, paper work, and the documentation of things like the company plan is a tremendous and long process.
LLC description. An LLC is a hybrid that combines the best aspects of a limited partnership and a regular (or “C”) Corporation. A C Corporation is a more formal arrangement and is very expensive to set up, but has the potential to save more in tax dollars. In a regular limited partnership (LP), a limited partner invests capital into the LP with the knowledge and security that he/she will only have liability exposure for the amount of the investment, rather than posing risk to the individual’s personal assets should the business bankrupt.
The LLC gathers the best characteristics of both the Corporation and the Limited Partnership by creating an entity with the following features:
- Has no limitations on how owners can split profits,
- Does not have double taxation,
- Has limited liability for its owners, and
- Is simple to operate.
The LLC offers simplicity, ease and flexibility in its operation and only costs about $2,000 to form. An LLC is taxed as a partnership, so it has no limitations on how owners can split profits, and there is no double taxation to worry about either. However, an LLC also has the characteristics of a corporation in that it has limited liability protection for all of its owners. This limited liability protection is why people form LLCs to purchase homes rather than purchasing a home and allowing a loved one to live in it without a formal arrangement. Limited partnerships only offer liability protection for the limited partners and not the general partners. An LLC is also simple to operate, with less formalities and record keeping required than that of a C corporation. If you operate an LLC with just one investor, the ease of operation is even greater.
LLCs are a relatively new form of ownership and is quickly becoming the entity of choice. First recognized by the IRS in 1988, LLCs offer the limited liability protection of a corporation and the tax advantages of a partnership without the restrictions of a C corporation. The LLC is still evolving. For example, although the LLC is provided pass-through treatment of revenue for federal taxations purposes, individual states may tax it differently. Most states tax the LLC as a partnership, whereas others, such as Florida, tax the LLC as a corporation. Check with your tax accountant to see how LLCs are taxed in your state.