Investing in real estate isn’t just about picking the right property—it’s also about setting it up the right way. Choosing the best structure can legally protect you and give you tax perks. In the U.S., options like LLCs, S-corporations, REITs, Delaware Statutory Trusts (DSTs), and cost segregation strategies each offer different benefits. This guide explains these setups clearly, with real-life examples and plain language, so you can make a smart choice.
1. LLCs: Flexible & Protective
What it is:
A Limited Liability Company (LLC) is a business entity that lets you hold investment properties while protecting personal assets. You own it, not the property directly.
Benefits:
- Liability protection: Tenants or lawsuits target the LLC—not your home or savings
- Pass-through taxation: Profits and losses go on your personal tax return—avoiding corporate tax
- Mortgage interest deduction & depreciation: These tax breaks are fully available
- Qualified Business Income (QBI) deduction: You may deduct up to 20% of your rental income before 2026
- Separation of finances: Keeps your business and personal funds organized, which auditors appreciate
- Flexible ownership: LLCs can have partners with different investment shares
Potential drawbacks:
- Setup costs: State fees and annual filings vary—some states are costly
- Financing challenges: Lenders may offer less favorable terms to LLCs than individuals
- Admin effort: You must maintain records, separate finances, and create an operating agreement
Real-life tip: Many investors use separate LLCs per property to limit risk—but consider insurance and potential Series LLCs instead .
2. S and C Corporations
S Corporation
- Offers liability protection like an LLC, with pass-through taxation.
- However, not ideal for holding real estate directly due to self-employment issues and administrative complexity.
C Corporation
- Real estate held here suffers double taxation—first at the entity level, then again as dividends.
- Rarely used for direct property ownership due to tax inefficiency.
3. REITs: For Fund-Like Investing
What is it:
A Real Estate Investment Trust (REIT) is a company that owns income-producing real estate and distributes at least 90% of earnings to shareholders.
Tax advantages:
- No corporate tax on income distributed to investors
- Investors pay income or capital gains tax depending on distribution mix
- Qualified dividends may get the 20% QBI deduction via pass-through treatment
Why consider it:
- Easy passive income
- Liquid, like owning stock
- Diversification across property types
Downside:
- Less control over assets
- Distributions taxed at higher ordinary income rates
- Best held in tax-advantaged accounts like IRAs
4. Delaware Statutory Trusts (DSTs): Passive 1031 Exchange Tools
What is it:
A DST allows fractional ownership of large commercial properties, structured as trusts federally recognized for tax purposes.
Main benefit:
- Enables 1031 exchanges into institutional-grade properties without full ownership
Plus points:
- Limited liability
- Simple structure—no annual meetings
- Suitable for investors seeking passive income
Consideration:
- No operational control
- Exit may depend on trust terms
5. Cost Segregation: Accelerate Deductions
What is it:
An engineering-based study that identifies property components (lighting, landscaping, roofs) that can be depreciated faster—over 5, 7, or 15 years instead of 27.5 or 39.
Tax advantage:
- Front-load deductions to significantly reduce taxable income in early years
- Bonus depreciation allows 60% this year and 40% next on qualifying assets per TCJA
Ideal for large purchases over $750K.
6. 1031 Exchanges: Defer Capital Gains
What it is:
Section 1031 allows you to trade a real estate investment property for another “like-kind” one within 45/180 days, deferring tax on gains.
Why it matters:
- Keeps more capital working in real estate
- Can be done via DSTs or direct real estate swaps
7. Combining Strategies for Maximum Benefit
Savvy investors often blend structures:
- Hold properties in LLCs, use cost segregation, and do 1031 exchanges into DSTs or new LLCs
- Or invest in REITs for passive income while managing active assets via LLCs
- Combining QBI deduction, depreciation, and exchanges creates powerful tax efficiency
Final Takeaway
For most U.S. investors, an LLC real estate US setup provides the simplest and strongest mix of LLC property benefits—liability protection, tax advantages, flexibility, and professional image. But for scale or diversification, consider REITs or DSTs. When timed right, adding cost segregation and 1031 exchanges can greatly improve returns.
Quick Comparison
| Structure | Liability Protection | Tax Efficiency | Control | Ideal For |
| LLC | High | Pass-through + QBI | Full | Individual investors |
| S Corp | High | Pass-through | Limited | Select business scenarios |
| C Corp | High | Double tax | Full | Rare in real estate |
| REIT | Moderate | No entity tax | None | Passive investors |
| DST | High | Pass-through + 1031 | None | Passive investors with capital |
