The answer is, "It depends." What else would you expect from a lawyer? The reason the question defies a simple answer is that there are many factors that go into the decision and the importance of these factors depends on the particular situation.

Let's first look at your choices, if there is a single owner, your choices are to hold title individually, through a corporation or a "foreign" limited liability company.

If there are two or more owners (and a husband and wife can be the two owners), you may hold title individually (for example, as joint tenants or tenants in common), or through a corporation, general or limited partnership, or a limited liability company.

Tax Factors. The most commonly used entities for holding real property are partnerships, "S" corporations and limited liability companies. Each of these entities is a "pass through" entity for income tax purposes. That is, the entity is not taxed; the income or loss is passed through to the individual owners who report the gain or loss on their personal returns. Also, gains are not taxed twice as they are with a regular corporation (once at corporate level and again at the individual level when the profits are distributed). In general, because of this double taxation, regular corporations are not used to hold real property. 

One important difference with "S" corporations is that debt on real property does not create additional basis as it does for partnerships and limited liability companies (which are partnerships for tax purposes). Since deductions are limited to the basis of the property, an "S" corporation may limit your ability to take advantage of losses.

One other tax factor to remember is state taxes. All entities, except general partnerships, pay an annual franchise tax of $800, whether there is a profit or not. Additionally, a limited liability company pays a tax on gross receipts (again, whether there is a profit or a loss). The gross receipt's tax ranges from zero — for receipts less than $250,000, to $4500 — for receipts in excess of $5,000,000.

When dealing with leverage investments (as most real estate investments are), it is usually better from a tax standpoint to hold the property individually, or in a partnership or limited liability company.

Personal Liability. Another important factor is the personal liability of an owner for the debts and obligations of the entity. In any individual form of ownership, the owners are personally liable. The same is true of a general partnership, or for the general partner in a limited partnership. The owners in a corporation or in a limited liability company have no personal liability. Only the assets of the entity may be reached to satisfy the entity's debts. No form of entity protects an owner from his or her own acts, so using a limited liability entity is never a substitute for adequate insurance.

While in most business this personal liability of the owners would weigh heavily in favor of the corporation or limited liability company, there is one down side when it comes to real estate entities. If a lender seeks a personal guaranty of a mortgage from the owners, the law is clear that the guaranty will not overcome the protection of California's anti-deficiency laws. However, if a shareholder of a corporation or a member of a limited liability company guaranties the entity's debt that guaranty may be effective to impose personal liability for any deficiency after a foreclosure.

On the other hand, if the exposure is to a second mortgage (a sold out junior mortgage is not subject to the anti-deficiency limitations), then an ``S" corporation or a limited liability company is clearly preferable if personal guaranties can be avoided.

Other factors. It may seem that after considering the tax and liability factors, the limited liability company is the best choice. And it often is. It has the same flexibility as a partnership in terms of specially allocating profits and losses and in management. If there is only one owner, however, you will not be able to form the limited liability under California law. A California limited liability company requires two members. But the entity can be formed in another state (such as Delaware) with only one member. The ``foreign" limited liability company can then qualify to do business in California.