Chapter 2 Frequently Asked Questions

By Jason Watson, CPA
Posted Sunday, May 25, 2025

Here are some FAQs you might find helpful from our chapter on other entity considerations beyond what entity type to deploy-

What’s the difference between equity and economic interests in an LLC?
Equity interest refers to ownership and voting rights, while economic interest relates only to sharing in profits and losses, not control (generally). Lots of creativity can be implemented with these interests.

Can I give someone an economic interest without making them a co-owner?
Yes. You can allocate profits and losses to someone without giving them formal ownership or voting power.

Is angel investor money a loan or capital injection?
It depends on intent and documentation. Loans must have repayment terms; capital injections convert into equity or profit-sharing.

Can LLCs simplify real estate ownership for multiple properties?
Yes. LLCs allow you to compartmentalize properties, control ownership transfers, and manage liability across assets.

What is a tiered structure in real estate?
It involves creating a holding company that owns property-specific LLCs, improving anonymity and wealth transfer.

Do I need separate LLCs for each property?
Ideally, yes. It limits liability to that asset, but increases complexity and costs.

Do Operating Agreements matter in real estate entities?
Absolutely. They define control, profit splits, exit strategies, and are essential when disagreements or life events arise.

Are Nevada or Wyoming LLCs better for asset protection?
Not always. Courts often look through out-of-state entities when local activity occurs, limiting their protective value.

Is it a bad idea to hold rentals in an S Corp?
Yes. S Corps don’t allow step-up in basis on death and force gain recognition on asset transfers.

What’s the risk of trapping assets in an S Corp?
When distributing property, it’s treated as a sale, creating tax liability—even if you’re just moving the rental property around (i.e., changing title from the S Corp to you).

What is a waterfall distribution in an LLC?
It’s a method of allocating cash flow where investors get paid in a specific order, often after preferred returns.

Can I still use cost segregation in a C Corp?
Yes, but the benefits are limited if your personal tax rate is higher than the corporate rate.

Is it better to gift LLC interests or property directly?
Gifting LLC interests can allow valuation discounts and control over timing—often better for estate planning.

Do entity structures affect 1031 exchange eligibility?
Yes. The entity holding the property must also be the one completing the exchange—changing this may disqualify the deferral.

Can I take depreciation on property owned in a trust?
Yes, if the trust is a grantor trust and the property is rented out. It works like individual ownership.