Private real estate investments are typically structured through legal entities that limit investor liability and facilitate the flow of income, gains, and losses to individual investors in a tax-efficient manner. The three most common structures are Limited Liability Companies (LLCs), Limited Partnerships (LPs), and Delaware Statutory Trusts (DSTs). Each has different characteristics that make it appropriate for different investment situations.
Limited Liability Company (LLC)
The LLC is the most commonly used structure for private real estate investments today. An LLC provides liability protection (investor exposure limited to invested capital), flexible management governance (specified in the Operating Agreement), and pass-through tax treatment (income and gains pass through to members without entity-level taxation). LLCs can be structured as member-managed or manager-managed — most investment LLCs are manager-managed, with the sponsor making day-to-day decisions while investors hold passive membership interests.
Limited Partnership (LP)
The LP is the traditional structure for private real estate, still widely used by larger operators and institutional funds. An LP has a General Partner (the sponsor, with unlimited liability and full management authority) and Limited Partners (investors, with liability limited to invested capital and no management authority). The LP structure is generally less flexible than the LLC but is familiar to institutional investors and works well with certain tax structures (particularly when real estate losses need to flow through to individual investors).
Delaware Statutory Trust (DST)
The DST is a specialized trust structure that qualifies as like-kind property for 1031 exchange purposes — making it uniquely valuable for investors with appreciated real estate looking to defer capital gains. DSTs are highly regulated and inflexible (beneficiaries have no ability to influence management decisions), but they allow passive investment in professionally managed institutional real estate with 1031 exchange eligibility that most partnership interests do not have.