In Florida, a Florida Land Trust allows investors or owners to be protected from public disclosure-Stefan
It’s a disappearing act commonly pulled by the ultrarich. One day they’re house-hunting and then—voilà!—they’re gone without a trace.
To keep their real-estate transactions as private as possible, starlets, tycoons, sports stars and other high-end home buyers are increasingly forming limited-liability companies (LLCs) and trusts. They bury multimillion-dollar real-estate deals under legal entities that, when set up properly, are virtually untraceable.
And, according to an analysis for The Wall Street Journal by real-estate company Zillow, Z -4.00% the more expensive the house, the greater the likelihood that a LLC or trust will hold the deed. Over the past year, 27% of U.S. homes that sold for more than $5 million were bought by LLCs or trusts rather than by individuals, Zillow data show. Just five years ago, only 7% of homes over $5 million were bought under an LLC or trust. In the $2 million to $3 million range, 17% of buyers create the legal entities. By comparison, only 2% of homes between $200,000 and $400,000 were purchased under an LLC or trust.
For property purchases of $10 million or more, “it’s done almost 100% of the time,” says Tomer Fridman, a partner at Ewing & Associates Sotheby’s International Realty in Calabasas, Calif.
The allure of an LLC goes beyond anonymity. It provides the legal protections that a corporation offers without the extensive paperwork and fees. Under an LLC, if someone were injured while visiting the home, the visitor could sue the company but not the individual homeowner, thus protecting the homeowner’s assets. An LLC also has “pass-through taxation,” meaning that any profit or loss passes through the company and onto the individuals who own it. They, in turn, report the profits or losses on their personal tax returns. (A corporation, conversely, must pay taxes twice, once on the profit and again when profit is distributed to shareholders.) With a single-owner LLC, the capital-gains tax rate is also lower, says David Hryck, U.S. head of international tax at New York-based law firm SNR Denton.
An LLC member can also funnel expenses, such as landscaping costs and homeowner-association dues, through it, says Matthew Richardson, a partner at Sheppard Mullin Richter & Hampton law firm in Los Angeles.
There are challenges to LLCs and trusts, too. For one, annual-report filing fees and taxes can add up quickly, particularly if a person sets up a separate LLC for each property owned. In California, for example, the minimum tax for each LLC is $800. To further complicate matters, some buyers will set up double LLCs so that, for example, an LLC in Nevada is owned by an LLC in Delaware. In short, because fees and tax regulations vary by state, home buyers should consult a lawyer or financial adviser before setting up an LLC.
LLCs first became popular in the 1990s, but their use increased after the economy soured, typically because wealthy individuals wanted to cloak conspicuous purchases. Some hedge-fund managers and bankers, for example, bought under LLCs when they “normally wouldn’t have,” says Edward Mermelstein, a real-estate attorney in New York. Adds Rob Giem, an agent in Orange County, Calif.: “A lot of people in our marketplace were doing phenomenally well but felt it was in bad taste to let people know about the $25 million house they just bought.”
The increase in investors buying properties to rent out has also fueled LLC ownerships, says Stan Humphries, chief economist at Zillow. In Hawaii, 11% of all homes sold last year used a legal entity, making it the No. 1 state for LLCs, Zillow research found. California, at 6.1%, came in second. David Banks, a partner at Honolulu law firm Cades Schutte, says many Hawaiian homes are purchased as investment properties and need the liability protection. In addition, the state has some of the lowest annual-report filing fees—only $25 compared with Maryland’s $300.
Many LLCs and trusts are named after the property address or building, which helps real-estate attorneys who act as managers or trustees keep track of them. Sometimes, buyers and sellers will come to an attorney with a trust named after their kids, their pets or even their favorite Greek mythology figure.
There are downsides to LLCs, too. Not every home purchase is eligible because some banks forbid home buyers from financing through LLCs. And co-op apartments in cities like New York are resistant to allowing people to buy under a legal entity because co-op boards tend to prefer named owners, says Ron Gitter, a real-estate attorney in Manhattan.
In the end, however, the biggest snag comes when the entity isn’t set up properly, blowing the homeowner’s cover. The most common blunder: personal mailing addresses. Paula Del Nunzio, a managing director at New York’s Brown Harris Stevens, says she has seen water bills sent to the LLC owner instead of the attorney, which exposes the purchase.
Mr. Giem, the agent in Orange County, has found a solution to help protect his ultraprivate clients from swarming paparazzi and inquisitive reporters: In some cases, he has offered up his own personal home address. “To this day, I forward mail to about four different clients,” he says.
Write to Alyssa Abkowitz at [email protected]