Colorado Considers Commercial Tax for Residential Property
I would not have believed it if I didn’t hear it with my own ear. The Colorado General Assembly considered taxing residential property as commercial if that residential property was held in an LLC or other entity. This would result in about a 400% increase in property tax. For now, the proposal did not make it out of committee. Concerning is the number of commissioners and government officials pushing the proposal. No doubt the proposal will be back next year. Perhaps it is time for a refresher on why Colorado residential real estate is held in LLCs.
We routinely advise clients to hold Colorado residential real estate in LLCs. The typical situation is a rental property, vacation home, or unmarried relationship. We recommend this structure because (1) it limits personal liability, (2) it provides an agreement to resolve disputes, (3) it provides an exit strategy, and (4) it avoids Colorado probate.
LLC’s limit personal liability surrounding residential real estate. There are two types of liability protection. The first is protection from liability resulting from the real estate. An example would be a fire caused by the landlord’s negligence. The LLC would be liable, but the individual LLC members would typically not be liable. The second is protecting the real estate from general creditors. An example would be a judgment against an LLC member. The judgment creditor usually gets a charging order but not a lien against the actual real estate.
LLCs provide rules for resolving disputes. For example, in a shared vacation home, the LLC provides an occupancy schedule and other agreed upon rules about how the property will be used. The LLC provides procedures when one LLC member does not contribute funds to pay expenses. The LLC provides rules regarding how a membership interest is sold. The list of rules can be long to avoid disputes, later.
An LLC agreement provides an exit strategy. This is especially true with unmarried individuals going in on a property, together. Sometimes it is a romantic relationship. Other times it can be friends going in on a hunting cabin or vacation home. If the real estate is held in their individual names, winding down the relationship and selling can be very expensive if not impossible.
An LLC can avoid Colorado probate. In Colorado, LLC interests are considered personal property not real property. Property held in a non-resident’s individual name could require an ancillary Colorado probate to transfer ownership. The LLC interest does not.
Finally, holding real estate in an LLC may not be advisable in other states or countries. Be sure to check with legal and tax counsel before deciding on a strategy.
