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If you own one or more real estate rental properties, a question to ask yourself should be what is the best way to legally protect yourself and your properties from liability?  The top strategy utilized today is to create an LLC, or a Series LLC.

A Limited Liability Company (LLC) is a business structure allowed by state statute.  Owners of an LLC are called members and may include one or more individuals, trusts, corporations, or other LLC(s). They offer a great deal of flexibility in terms of how they are managed and operated. LLC(s) can help protect a property owner’s personal assets if they’re involved in a lawsuit by shielding their personal assets from business debts. As long as an LLC and your personal assets remain separate, if a legal claim exceeds an LLC’s assets your personal property will remain safe.

The LLC business structure combines the limited liability of a corporation with the pass-through taxation of a partnership or sole proprietorship. This means the owners are not personally liable for the debts or liabilities of the business, and the business’ profits and losses are passed through to the owner’s personal tax returns.  Owners do not have to pay corporate income taxes on the business’s profits.

If you use your real estate as a rental or an AirBNB-type asset, and you own more than one of these “investment properties,” a series LLC is an option to separate each property’s liabilities from one another and from your personal assets. By keeping each property in a separate series of the LLC, if there is a major legal claim from a tenant/renter, recovery on a claim will be limited to the individual property that is the subject of the claim.

Before transferring the property into an LLC, one thing to consider is what does your current mortgage say.  Transferring real estate into an LLC may trigger the due-on-sale clause, which means the lender can demand full repayment of the loan upon the transfer of the property to the LLC.  That is why I always recommend having the transfer approved by your lender prior to recording anything with the county.

A second thing to consider is the potential tax implications.  An LLC offers flexibility in how it is taxed, but it is recommended to consult with your tax advisor to make sure there won’t be any negative tax consequences to you.

The main roadblock most clients face with this type of asset protection are the fees associated with it.  The routine fees you may encounter are formation fees, annual state fees, annual reporting requirements with the state, and a more complex tax return.  However, when you look at the asset protection advantages the LLC provides, the general consensus is that the fees are worth it.

Real estate matters are complex. Most real estate transactions are the largest transactions you will do in your life.  We have formed countless LLCs over the years for our clients. If you are ready to form a Limited Liability Company, contact us today and let’s work together.