My father has built a small 5 unit apartment building and he also has two houses he built on the same peice of property that he rents out in Mississippi. He does all the maintenance, collection of rent, and the rest of the landlording responsibilities by his self. I am concerned because he has had some petty legal suits put up against him by tenants but nothing big…yet. I don’t want him to lose his personal assets such as his house and other land. How can he protect his self?
Put them in an LLC?
or
Put each property under a different LLC?
Also his income he makes off rentals how is that taxed?
Please any help would be greatly appreciated! :help
my suggestion is two fold- first check and see if your state allows "series"llc’s …its one LLCwith legal compartments to shield the assets from liabilities of the other assets. then get a liability insurance policy and have an attorney review your dads lease, for a fee they will include a portion that requires Tenants to go to arbitration prior to a lawsuit which usually stops anything frivolous as arbitrators are 200.00 per hour for a good one- hope that helps…
dave/Texas
rental property is taxed on 1040 Sch E. Rental income is passive and not subject to self employment taxes. The properties themselves are capital gain investments, so overall this is one of the best kinds of investments to own, from a tax perspective.
Generally rental income from entities (partnership, S-corp or an LLC taxed as partnership or S-corp) makes no difference. passive income from an entity passes through to the owner and retains its passive character and taxation. capital gains can get a little more complicated. losses also complicate the taxation because different entities treat losses and basis differently.
You’d want to avoid getting into a C-corp where getting the cash out of the corp would convert the rental income to dividends or salary at a higher tax rate and limit the use of any losses for the owner’s benefit.
Series LLCs might be OK, but there is not enough case law to determine exactly how they will be treated. Stick with strategies with a rich history of case law and let someone else be the test case.
LLCs and other entities won’t do much for him since it’s most likely his actions on the part of the business are the ones that generated the liability. If he plans to continue to do the management, he needs to separate the ownership from the management. That gets complicated quickly, especially when considering tax and estate planning, but it is the best way to insulate his personal assets from business liability if he continues to manage the business himself.
What if I were to open a property management business to manage the properties for him or if he he did? I could charge him next to nothing just so we could have the protection, and since where he lives there are no other property management companies locally I think I could pick up other clients. Would this work?
Under-capitalized entities and non-arms length transactions are badges of fraud in the context of fraudulent transfers. You have to show you can support your business with the income it generates. Having other clients and charging him market rates will help show the entity isn’t a sham. Be aware you are now exposing your personal assets to any liability generated by your actions by managing his property.
If he manages the property under any situation, he is always personally responsible for his own actions that cause an injury and his personal assets will be available to pay any judgment.
In this state I believe you can manage a relative’s property if you are within 3 degrees of consanguinity (?!).
Call your state Department of Real Estate licensing for clarification on your state’s laws.
Of course liability is a whole other issue. Maybe you should help check out those units–are there smoke and carbon monoxide detectors? Is the electrical wiring safe? Are there obvious red flags like loose bannisters or stairs?
Having a well-maintained and well-managed property reduces liability a lot. Are safety checks done twice a year and documented in writing? don’t put yourself at risk if there is a lot of deferred maintenance.