BLL, you’ve really got me thinking. I have a couple of new investment properties – my first. From what I’ve been reading, I’m thinking of this plan…please let me know your thoughts:
Create a business LLC to over see the operations of the investments (formally separating them from our personal assets) – were small-timers, is it even worth it? We hire out the property management. I’m also trying to think in terms of tax benefits so that’s why I thought we should at least create a business entity – but I’m confused on that too.
Each prop has minimum 1 mil liability coverage instead of creating an LLC on each property – BLL has a good point – that’s why we have insurance.
Transfer titles to our family trust – the bank wouldn’t allow this during the transaction. If we do this, is it just a waste of time/money to have a business LLC at all? It seems like mixing the personal stuff with the business.
BLL, from your posts, it sounds like unless you’ve got alot of money and can create an ironclad system of asset protection, creditors can get around the LLCs. Right?
Thanks in advance! Your posts have been very helpful…
It’s a smart idea to use an entity if you hire out property management. Personally managing the property is the main way around the LLC.
Another way to protect the equity is to mortgage the property and invest the proceeds in exempt assets.
You can transfer property to a revocable trust for estate planning purposes and the bank can’t do anything about it. They can if you change the beneficial interest. I wouldn’t do it anyway. I prefer to have the family trust own the entities and the entities actually own the business assets. Just remember that a business entity cannot hold personal assets (e. g. family home, family car, personal checking account). Business entities must actually engage in business for them to be treated as businesses.
So if I create one LLC only for the state in which we’re doing business then transfer the title of both properties to that same LLC, which would be then owned by our family trust — this would be a good “business” structure? My business entity would be in business of really estate investments, operated from a dedicated office in my home — would LLC or corp be the best entity to form?
When you refer to protecting the equity, would that mean mortgaging the equity–cash out refi? What are examples of exempt assets?
Thank you for your time in expanding on this…any others with advice would be great.
Best is a relative term. You want something that is best for you situation. Just about everyone will say that LLCs are the only way to hold real estate. They will also say c-corps are the worst way to hold property. Unfortunately, a pass through entity like an LLC is one of the worst structures for an individual with significant income outside of real estate. If he uses a pass through entity, that income gets reported on his personal return where it is taxed. If he uses a c corp, that income stays with the corporation and can be used to fund benefit programs that are 100% tax deductible to the corporation and 100% tax free to the individual. Instead of paying taxes on real estate income, he is getting tax free benefits with pre-tax income that will never be taxed. A person can use a c-corp to accumulate wealth as long as he doesn’t need access to the cash immediately. Pass through entities are more appropriate when the RE income will be the primary source of income or a RE loss can offset other income. The right answer comes from a careful analysis of your individual situation in the context of the available tools by a qualified planner.
That is the best way. The most common exempt assets are your personal residence, life insurance, and annuities. ERISA qualified retirement plans are also exempt and you can use the excess cash in a corporation to fund one.
Very useful information here. You’ve given me more reason to analyze this all a bit closer. Thanks for the starting point…now I’m off to dig out info on c-corps. We’ll see what works best for us once I learn more.