An LLC is a smart and easy way to create separation between your properties and “you”. Without this separation, you and the assets in your name, such as other (non-homestead) properties, vehicles, wages, and investment accounts, can be targeted in a lawsuit.
By setting up an LLC, you will establish a business that takes ownership of and liability for the property. You will be the owner of the LLC, but you can also put family members or business partners as co-owners, or members. Insulating yourself from liability is often one of the biggest concerns with real estate investing and insurance alone may not be sufficient.
If you own multiple properties, whether for investment or rental, you should consider an LLC for each property. The reasons are simple: protect yourself, protect your assets and potentially claim tax benefits. Let's look at a few scenarios:
This might be the case if you have vacation homes. Since you own the property, you are liable for whatever happens at the property. The house, apartment or condo may not be in regular use throughout the year, but when the holidays come around, it might be the destination for your family and friends. Or worse, maybe it's used by only your friends or distant family.
If you are letting friends or family stay, what stake do they have in the property? None. If something were to happen to them on the property, you and anything else in your name are vulnerable if a lawsuit that were to arise.
If you own multiple properties and each property has tenants, you are running a business and you need an LLC. However, it might make more sense to open an LLC for each property. This is not as confusing and stressful as it may seem.
Owning a rental business can have big cash flow advantages, but you will become vulnerable to mishap and lawsuits by your tenants. If something terrible happens to your tenants and you find yourself in a lawsuit, every property listed under your LLC is available for collection by creditors. Creating an LLC is the first step to peace-of-mind protection. However, you are done there. You must take additional steps like opening a bank account for each property and purchasing liability insurance to fortify your protection.
With the help of a real estate attorney and CPA, your properties and your assets can be protected which ultimately provide peace-of-mind for yourself and your family.
In this case, creating an LLC might complicate your situation and might not provide protection for you. If you plan to live in your property, creating an LLC likely will not interfere with your ability to homestead the property for real estate tax purposes.
Consulting with an attorney and CPA is always good advice when purchasing any property. Every scenario is different and your attorney should treat it that way.
Contact Jo Ann Koontz, an attorney and CPA, to make sure your property and assets are protected before you buy property.
If you're flipping the house after renovation, an LLC may be a great vehicle for you to again limit liability and minimize taxes. You may meet the classifications of a "Real Estate Professional" (a specific set of IRS rules and requirements), opening the doors to some alternative tax treatment. The houses you buy and sell may be considered inventory which also has some benefit, but you must know the rules and follow them closely.
