Can You Form a Holding Company for Multiple Properties?

A holding company typically works as a “parent company” of multiple businesses under it, whether they’re LLCs or corporations. This firm manages its subsidiaries and handles overall operations with its voting stock.

But if you’re a real estate investor with a diversified portfolio, you may wonder whether you can start a holding company for multiple properties. Keep reading to find out the answer.

Key Takeaways

• A holding company can be formed to own and manage multiple properties. It typically has subsidiaries that can hold specific types of properties. 
• With each property under a subsidiary of a real estate holding company, creditors can only pursue the assets of that company.
• Real estate holding companies can operate as LLCs or corporations. Both business structures are taxed differently and required to file the necessary tax returns.
• You can reduce taxable income from running a real estate holding company with strategies like depreciation of rental property and business expense deductions.
• Before launching a real estate holding company, consider other factors such as access to business funding, compliance requirements, and your desired location.

Can I Use a Holding Company for Multiple Properties?

You can use a holding company for multiple properties. This entity is called a real estate holding company. It works just like a traditional holding company but owns and manages properties.

Forming and running a real estate holding company comes with various advantages. Let’s look closer at some of these benefits.

Asset & Liability Protection

If you put multiple properties in a single company, a lender can pursue the firm’s assets and your personal assets. A real estate holding company has subsidiaries that can hold these properties, decreasing the risk of total asset seizure. Creditors with claims against one property can only access the assets of its owner.

Moreover, a well-structured real estate holding company reduces the personal liabilities of each subsidiary’s owners and staff members. Instead, the business incurs potential legal liabilities.

Tax Treatment & Optimization Strategies

Real estate holding companies can operate as an LLC or a corporation. Each of these business entities is taxed differently.

LLC Taxation

LLCs are treated as “disregarded entities” for federal income tax purposes by default. However, they can choose to be taxed as a partnership or corporation. LLCs change their initial tax classification by filing IRS Form 8832.

• If you run a multi-member LLC, you file IRS Form 1065 and issue a copy of Schedule K-1 to each owner. Partners report their share of a multi-member LLC’s income, losses, and deductions on Schedule K-1.
• For LLCs taxed as S corporations, they file IRS Form 1120-S. LLCs taxed as C corporations submit IRS Form 1120.

Finally, LLCs are pass-through entities. Their profits and losses flow through to their owners’ individual income tax returns; hence, they don’t have to pay corporate income tax.

Related Resource

Learn how LLCs avoid double taxation from the NCH blog.

Corporate Taxation

Corporations are taxed once at the corporate level and again at the shareholder level. However, they pay taxes at a lower rate than other business entities. The Tax Cuts and Jobs Act (TCJA) of 2017 set the federal corporate tax rate for U.S. corporations at 21%.

Real estate holding corporations report taxes on IRS Form 1120.

Tax Optimization Strategies

By forming and operating a real estate holding company, you can use various strategies to reduce your tax burden. They include the depreciation of rental property and business expense deductions.

The term depreciation describes the gradual decline in an asset’s value due to wear and tear, age, and obsolescence. You can use it to recoup a part of a rental property’s total cost. The Modified Accelerated Cost Recovery System (MACRS) is used to calculate depreciation.

Additionally, you can write off business expenses such as mortgage interest, property taxes, and maintenance costs for rental properties from your taxable income. These expenses are reported on Schedule E, Part I of IRS Form 1040 or Form 1040-SR.

Administrative Advantages

While real estate holding companies manage subsidiaries, they don’t participate in the daily operations of each subsidiary. Instead, subsidiaries manage the different areas of their business, from accounting to property maintenance.

Inheritance & Succession Planning

You can also form a real estate holding company to distribute assets to family members. Under this setup, company shares or ownership are given to heirs instead of the properties held by the holding company. Overall, you save on the costs associated with transferring properties to your beneficiaries.

Operating a real estate holding company also creates a great opportunity for succession planning. The process is done as company leaders prepare to leave the business. Multigenerational businesses usually conduct succession planning, but it can be done if a third party takes over a holding company.

Other Factors to Consider

Access to Business Funding

If a subsidiary of a real estate holding company manages business funds independently, it can get capital more easily. For example, the subsidiary can negotiate loan terms based on their unique risk profile or show its financial performance to potential lenders. 

Corporate Compliance

Specific compliance requirements apply to real estate holding companies, depending on their business structure.

Also, proper record-keeping is highly recommended for real estate holding companies. Failing to do this can increase the company’s risk of incurring legal liability.

Geographic Considerations

You can form a real estate holding company in any U.S. state, although each jurisdiction offers unique advantages and disadvantages.

For example, some states enforce strong asset protection laws and impose no state-level taxes on businesses. Other jurisdictions allow you to register as a foreign LLC or corporation if you own and manage property located within their borders. Nevada offers all three, making it a good location for starting a real estate holding company.

Bonus Resources

• Get expert advice on setting up a real estate LLC from these articles:
  • Everything You Need to Know About Creating a Real Estate LLC
  • Why Real Estate Investors Use LLCs for Each Property
  • Should You Form a Separate LLC for Each Real Estate Investment?
• Watch this episode of Ask NCH to know whether forming a holding LLC is a good idea.

Frequently Asked Questions

What is a real estate holding company?

A real estate holding company is a parent company with multiple subsidiaries and assets. It’s formed to manage different types of properties. The company can place each property that it owns into a subsidiary.

Furthermore, a real estate holding company controls its overall operations. It manages each subsidiary but doesn’t interfere with its daily operations.

Can I place multiple rental properties under one holding company?

Yes, you can place multiple rental properties under one holding company. However, creating subsidiaries and having them hold each property are a better option. This strategy limits the parent company’s exposure to legal liability, protecting your full investment portfolio.

What’s the difference between an LLC and a corporation?

An LLC passes its profits and losses onto its owner’s personal income tax return. Plus, it offers greater flexibility in management, ownership, and tax classification.

A corporation has shareholders who own different classes of stock. It’s subject to more internal compliance requirements and double taxation.

How does asset protection work for a real estate holding company?

Each subsidiary of a real estate holding company owns and manages a single property. If one of these companies face a legal claim, creditors can only pursue their assets. The other subsidiaries and their assets are protected from that company’s legal liability.

What tax returns does a real estate holding company file?

The tax returns filed by a real estate holding company vary depending on its specific business structure.

• LLCs taxed as partnerships file IRS Form 1065. Each member reports their share of business profits, losses, and deductions on Schedule K-1.
• S corporations file IRS Form 1120-S.
• C corporations file IRS Form 1120.

How does depreciation for real estate work?

If you own and manage rental properties under a real estate holding company, depreciation lets you recover certain costs of these properties. The MACRS system is used to calculate depreciation of rental properties.

How should a real estate holding company conduct succession planning?

A real estate holding company should conduct succession planning by identifying their future needs and goals and the most important roles to be filled. Next, the business should set a timeline, specific goals for potential successors, and a budget. Also, it should create detailed profiles of all identified positions.

Are there compliance requirements for holding companies?

Yes, there are compliance requirements for holding companies. These obligations vary by business structure and, in some cases, their home state.

Let’s take an LLC as an example. Generally, it must have an updated operating agreement, distribute business profits and losses to its owners, and hold corporate meetings. The last two need to be properly documented.

Can I form a real estate holding company in another state?

Yes, you can form a real estate holding company in another state. The business must register as a foreign LLC or corporation in the states where it owns and manages property. Do note that a real estate holding company’s compliance and tax obligations vary by state, so review and consider these requirements first.

How does a real estate holding company improve access to financing?

The subsidiaries of a real estate holding company can secure financing based on their current financial performance and unique risk profile. As a result, they can negotiate and get better terms from potential lenders.

Expert Tips From NCH

1. Maintain strict corporate formalities. Make sure your real estate holding company has separate bank accounts, detailed records, and updated governing documents to stay protected.
2. If you’re forming an LLC, compare your tax classification options. Consult a tax professional to help you choose the best tax classification.
3. Choose your formation state wisely. Compare each state’s asset protection laws, tax rates, and filing requirements before making your final decision.
4. Plan for growth from day one. Structure your real estate holding company with scalability and succession in mind.
5. Open business bank accounts for your real estate holding company and each subsidiary. This step ensures accurate accounting, strengthens your company’s liability protection, and simplifies tax reporting.

Protect Your Portfolio with a Well-Structured Holding Company

As a real estate investor, you can start a holding company for multiple properties. Each property in your portfolio can be placed into a subsidiary, increasing asset and liability protection. And, depending on whether the parent company is an LLC or corporation, it can gain certain tax advantages. A properly structured holding company lets you use these benefits and more to build your portfolio and substantial wealth.

If you’re forming a holding company as an LLC, NCH’s business formation experts are here to help you throughout the process.

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DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.