You as a Landlord and what you should consider for your asset protection and estate planning

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If you own real property that you rent out to a tenant, whether it’s a residential rental or a commercial space, you might want to consider forming an LLC to hold your building.

Being a landlord can put all your assets at danger of losing if someone gets injured on your property. I presume that you have insurance in place to protect you from that kind of liability. But what if their injuries exceed your insurance limits? What about legal fees?

I often recommend to my clients who are landlords that they place the rental property into an LLC. It is not a perfect solution, but it limits the claims of LLC creditors to the LLC assets and protects your other assets (such as your home and business) from those creditors.

Creating an LLC might be beneficial but not a perfect solution. Let’s see what the pros and cons are:

Advantages of creating an LCC for your rental business:

1. Asset protection. An LLC shields you from personal liability for carrying out some business decisions.
2. Tax advantages. Likely it will be taxed as a “pass-through” entity. This means that the income and capital gains from the LLC pass directly to the owner. Taxes are then paid as an individual. However, the owner still gets to enjoy the protection afforded by the LLC. Whether that is to your advantage, specifically, is something you should discuss with your CPA.
3. Anonymity. When you create an LLC you should transfer the property title in the name of the LLC. Then the property deed no longer has your name on it even in the property records. There are other steps that can be taken to ensure full anonymity including designating someone else for serve of process.

Disadvantages of creating an LCC for your rentals:

1. Cost. The cost may differ based on your state laws. Some states have a high mandatory tax, LLC registration, and annual LLC renewals.  While some states have little to no mandatory tax.
2. Legal fees. If you are serious about your full estate plan and asset protection, the legal fees are likely to increase slightly in comparison to the potential exposure. Working with one attorney may reduce your fees while preparing LLC documents, its operating agreement, LLC assignment to Trust, and your full estate plan.
3. Due-on Sale clause. This maybe a real hurdle depending on your lender. Some lenders offer a waiver if you prove that you have not changed the ownership and you remain in full control by showing your LCC Operating Agreement. However, other lenders require you to maintain personal liability for the mortgage and will not permit a transfer of the property to an LLC without full payment due on the loan.
4. Insurance. You might see a slight increase in your insurance. An umbrella policy with 2-million-dollar cap might cost you only extra $300 per month.  One thing to note, umbrella coverage might spread onto your LLC property because it offers insurance protection to you personally not as a business entity.

Remember that creating and maintaining an LLC is the key to its benefits. If you mingle your profits and personal expenses, there might not be any point in creating it.

As they say: Don’t put all your eggs in one basket. The same saying applies to your assets: diversify your assets! Don’t put all properties in one LLC.

Please call our office to discuss if you would like to schedule a consultation. (650) 383-7663