How to track net worth when you own property through an LLC

If you own property through an LLC, your net worth includes your share of the LLC's equity, not the property's value: the LLC's assets minus the LLC's debts, times the percentage you own. The same rule applies to a practice or any business you own through an entity. Count each entity on its own books, then add your share to everything you hold personally. (The household version of the same rule, with a trust, is in essay eight.)

That one rule is where most quick sums go wrong, and for a practice owner with accounts at several firms, a practice and a share of a rental, the error is usually large.

Why does the property's value overstate what you own?

Take a practice owner with:

• a brokerage account at one firm, worth $410,000
• a second brokerage at another firm, worth $185,000
• a 401(k) worth $260,000
• $42,000 in checking at a separate bank
• a home worth $950,000, with a $610,000 mortgage
• the practice, held in its own entity, valued at $600,000, with a $180,000 practice loan
• a 50% interest in an LLC that owns a rental worth $500,000, with a $320,000 mortgage, $18,000 in the LLC's bank account, and a $6,000 security deposit it holds for the tenant

The common way to add this up nets the home's mortgage, because it's personal, but counts the practice at its value and the rental at half its price, because those feel like assets. That gives $2,087,000.

How do you count your share of an LLC?

Put the LLC on its own books first. Its assets are the rental and its cash; its liabilities are the mortgage and the deposit it owes back:

The deposit is the line people miss. It sits in the LLC's bank account, so it looks like the LLC's money, but it belongs to the tenant. Leave it out and your share reads $99,000 instead of $96,000. The bigger miss is the mortgage: half of the rental's price is $250,000, and half of the equity is $96,000.

What about the practice itself?

The practice is often the largest asset a practice owner has, and the same rule applies: its value minus its own debts, at your ownership share. Here, $600,000 less the $180,000 practice loan is $420,000.

What the practice is worth is a valuation question, for a business-valuation professional or a CPA, and this essay doesn't answer it. What it does say is where the number goes: on the practice's own books, net of the practice's debts, and not mixed into your personal accounts.

What does the whole picture look like on one page?

The quick sum overstates it by $334,000, about 19%. None of the accounts is wrong. The error is in how they're added up.

What did the rental actually earn?

Value is half the question. Say each partner put $90,000 into the LLC three years ago, received $4,000 in distributions at the end of each year, and each share is worth $96,000 today.

The share grew from $90,000 to $96,000, which looks like about 2.2% a year. Counting the distributions, and when they arrived, the money-weighted return on the cash actually put in is about 6.5% a year. Neither number is wrong; they answer different questions, as essay seven explained. The second is the one to compare with the brokerage accounts and the practice.

And part of that equity growth wasn't growth at all: rent paid down the mortgage. Principal paid is equity moving from one line to another, as essay six explained, not a return.

What the software does, and what it does not do

Kept this way, every entity sits on its own books: the practice, the LLC, the personal accounts at each firm, each counted at the household's ownership share and consolidated into one number. Returns are measured on the money actually put in, so the rental, the practice and the brokerages can be compared on the same scale. To run your own numbers on one investment, the free XIRR calculator uses the same method.

What it does not do is the judgment. It doesn't decide whether to hold property in an LLC, how to structure a practice, or what a practice is worth. Those decisions stay with the owner and the attorney, CPA or adviser they hire, who can be given read-only access to the portfolios the owner chooses.

Nothing here is advice. It's the arithmetic, explained plainly.

If you want the instrument behind the writing: Eudos is the wealth intelligence platform for wealth builders. It keeps every account, property, practice and LLC on its own books, counts each at your ownership share, and measures returns on the capital actually invested. It's in private beta; the waitlist is at eudos.com.

To see a household kept this way, open the demo, a fictional family's wealth with no sign-up. The Thompsons have a joint portfolio, an LLC holding a brokerage account, and a trust holding a rental, each on its own books and consolidated at their ownership percentages.

The arithmetic, checked

• LLC equity: $500,000 + $18,000 − $320,000 − $6,000 = $192,000; × 50% = $96,000. Without the deposit: ($500,000 + $18,000 − $320,000) × 50% = $99,000. Half of the price: $250,000.
• Practice: $600,000 − $180,000 = $420,000 (the value is an illustrative entered figure, not a valuation).
• Net worth: $410,000 + $185,000 + $260,000 + $42,000 + $340,000 + $420,000 + $96,000 = $1,753,000.
• Quick sum: personal $1,237,000 (home netted) + practice at $600,000 + rental half-price $250,000 = $2,087,000; overstatement $334,000 ÷ $1,753,000 = 19.1%.
• Equity growth: ($96,000 ÷ $90,000)^(1/3) − 1 = 2.17% a year.
• Money-weighted return: −$90,000 at year 0; +$4,000 at years 1 and 2; +$100,000 at year 3 ($4,000 + $96,000); IRR = 6.53% a year.
• All figures illustrative; before taxes and fees.