Why Incorporate Your Real Estate?
Real estate can be a good investment, but one that comes with a host of risks and liabilities. If your properties are titled to a person and not a business entity, you are personally liable for damage or losses that may arise from accidents, injuries, interruptions to business or other events.
If one or several of your properties is involved in a lawsuit, your personal assets—cars, home, bank accounts, other real estate investments and more—are at risk. However, you can protect your assets by placing your properties in business entities to create a barrier between you and your assets. This makes it more difficult for the plaintiff’s lawyer to pursue your personal assets in the event of a lawsuit involving your investment property.
How to Incorporate Your Real Estate
Many lawyers agree the smart way to approach real estate asset protection is to form a LLC and purchase your real estate in the company’s name. By using this strategy, your real estate is the property of your company—not you, personally.
Typically, real estate investors choose to form an LLC rather than a corporation due to the tax benefits. Please consult your accountant for more information.
If you own one real estate investment…
If you own one piece of real estate as an investment, often the strategy is to form a LLC and purchase your property under that LLC’s name. This protects you on two levels: your personal assets are legally separated from your property in the event of a lawsuit aimed against your property, and your property is separated from your personal assets in the event of a lawsuit against you personally. This assumes, however, that your llc is formed in such a way that it has what is called “charging order protection.” This is a constantly evolving area of law, and not something you should attempt to guess on your own.
If you own multiple real estate investments…
Some real estate investors who own multiple properties place ownership of all of their properties under one LLC. While this is preferable to a sole proprietorship, it puts all of your real estate at risk in the event of a legal issue involving one of your properties.
If you own multiple properties, you may wish to consider a slightly different approach. A number of real estate investors have found success by utilizing a multiple-entity strategy, such as the one illustrated below:
This strategy involves forming multiple LLCs—one for each piece of real estate. (LLCs are used because they are pass-through entities with strong liability protection, assuming they have been formed so they have charging order protection.) Each property is then purchased under one LLC’s name, so that each LLC owns one property. Consequently, if one property is involved in a lawsuit, the other properties are out of reach and can continue to produce revenue.
Another strategy that can be used is forming a Delaware series LLC. A series LLC is composed of an individual series of membership interests. Each series is treated as a separate entity (the debts, liabilities and expenses of one cannot be enforced against another series of the LLC), and the series LLC pays one annual $300 Franchise Tax to the state of Delaware. The illustration below demonstrates how a series LLC can help provide real estate asset protection:
The predominant entity is a series LLC. The series LLC offers you tax advantages and separates your real estate investments from your personal assets, but each property is titled in the name of a separate series.
Please be advised that while there are several benefits to forming a series LLC, there are a few potential drawbacks. The first is that the legal separation of the assets and liabilities of each series is tested only in the certain courts of law. Banks are also largely unfamiliar with the structure, and can have difficulty understanding that each series can open a bank account.