How do multi-state SALT rules affect developers operating across multiple jurisdictions?
The appropriate entity structure for a real estate developer with multiple active projects depends on the development strategy, financing needs, investor base, and whether the properties are being built for sale or held for long-term income.
A common strategy is to use separate LLCs for individual projects, while a broader holding company or investment structure manages ownership and capital.
The Delaware Limited Liability Company Act (DLLCA), for example, provides a flexible framework for Delaware LLCs, but developers should recognize that LLC laws and protections vary from state to state. For larger portfolios, a Real Estate Investment Trusts (REIT) may also offer advantages.
LLCs taxed as partnerships are often a flexible choice for real estate development. A developer can create separate LLCs for different properties or projects, helping isolate the liabilities associated with each venture. This structure can also provide pass-through taxation, meaning income, gains, deductions, and losses generally flow through to the members rather than being taxed at the entity level first. Depending on the facts, this can provide significant real estate llc tax benefits.
Partnership tax rules can support special allocations and basis adjustments that may be valuable when ownership interests change. These features are often important for developers working with multiple investors or financing partners.
Developers should also consider how an LLC compares with other structures. The question of LLC vs S corp real estate is often less straightforward than it may appear because S corporations have restrictions on ownership, stock classes, and allocations that may not fit complex real estate investments. LLCs generally offer greater flexibility for multiple investors and project-specific arrangements.
A real estate holding company can provide another layer of organization for long-term ownership. Developers may place multiple property-owning entities under a parent company, depending on the legal, tax, financing, and operational objectives. The potential real estate holding company tax benefits depend heavily on how the entities are classified and how income, debt, and property transfers are structured.
REITs can be attractive when the primary goal is to hold income-producing real estate and raise capital from a broader investor base. A REIT generally can avoid entity-level federal income tax on income that is distributed to shareholders, provided it satisfies extensive qualification and distribution requirements. This can make the structure appealing for larger portfolios and investors who prefer stock ownership rather than direct partnership interests.
REITs may also be useful when a developer wants to attract institutional, foreign, or tax-exempt investors. In certain circumstances, foreign investors can use REIT structures to reduce or avoid U.S. tax on the sale of REIT stock, while tax-exempt investors may use private or public REITs to hold real estate in a way that can avoid direct U.S. tax on certain rental income and property gains. REITs can also provide a way to raise capital to buy out or “retire” founding members, repay debt, and fund additional acquisitions or development projects.
However, REITs are not ideal for every development business. They must satisfy detailed asset, income, ownership, and distribution tests. They are generally better suited to long-term, income-producing real estate than to businesses focused primarily on developing and quickly selling properties. Losses also generally remain at the REIT level rather than passing through to shareholders as they may in a partnership.
Recent changes under the One Big Beautiful Bill Act may also affect real estate investment, depreciation, financing, and other tax planning considerations, making the choice of entity even more important.
Ultimately, using a separate LLC for each project may provide the flexibility and liability segregation many developers seek, while a REIT may be appropriate for certain larger portfolios focused on qualifying real estate income and attracting outside capital. The right entity structure should be evaluated based on the developer’s current projects, long-term growth plans, financing arrangements, tax considerations, and investor objectives.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Rick Suid, Partner in Bennett Thrasher’s Financial Reporting & Assurance practice with extensive Real Estate industry experience, or call us at 770.396.2200.
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