Just curious with all the buzz about protecting assets, what is everyone typically protecting against? Why won’t insurance just cover it? How often are you getting sued?
I usually hide out in front with a fly swatter to protect my assets… so far so good…
Although, if you know of good insurance that will help protect you from capital gains taxes, or your personal assets from liability because of your ownership structure… let me know… It gets hot out there.
That’s good stuff 1031. You need ASSet protection to protect yourself from your consumer side. I put all my investments into my LLC. If I get foreclosed on it hits my business not my personal credit. If I get behind on my payments it won’t show on my credit.
So does that mean that your business entity has it’s own credit and mortgages / loans are taken out in its name? Or you use HML that lets you sign as your entity? I’m new so I doubt that I’d be getting any money to invest that I wasn’t signing on personally. Although if I did any ‘sub2’ stuff, then I guess it would protect me there if I defaulted and had purchased through my entity (or moved it into my entity subsequently).
1031store, I’m unclear as to how you would use an entity to protect you from capital gains taxes? Would another benefit be using an S corp to avoid social security taxes?
All my mortgages are in my LLC and I have not yet established biz credit. Thinking about D&B with their credit building program. Its about 550 bucks. I was new and started my LLC asap. Did it on-line and then had my lawyer draw up my articles of organization. You need to get a CPA to decide whats best suited for your biz.
Nate-WI
How are lenders comfortable lending to an entity that has no history? You didn’t personally guarantee these loans, you just set up an LLC and people gave it money? Wouldn’t their risk be extremely high conducting business like that?
You don’t establish business entities for tax reasons. You establish business entities for the legal protections the entities provide.
If you have nothing to lose, if your personal net worth is zero, then you may not benefit much from a business entity. However, as you accumulate wealth, you have a lot more to lose in the event of a successful lawsuit; and, therefore, the benefit to be gained from establishing business entities is much greater.
Insurance is not enough. When your tenant sues you, the suit will be for tens of millions of dollars. Your insurance company will pay a judgement up to the limit of your coverage, then you are on the hook for the rest. A business entity will limit your liability to the equity held by the entity itself, and shield you from personal exposure to a lawsuit against your entity.
Veilside,
Dave T hits the nail on the head as to legal liability reasons behind ownership liability and risk management, not capital gains.
Heaven forbid, something happens, you don’t want to have your personal assets at risk because of a large decision. As well, hopefully having other real estate assets equally protected because they are shielded as their own entity.
Chris
I’m confused, does an entity help capital gains or no?
No.
Most entities are “pass-thrus”…
Keith
The answer is NO, for both insurance and business entity. Tax liability is incurred when property is sold in a taxable transaction.
I can see no connection between a hazard insurance policy and capital gains taxes. The presence or absence of hazard insurance has no effect upon the capital gains tax calculation when your investment property is sold in a taxable transaction.
Whether investment property is held in your own name or within a pass-through business entity does not change the capital gains treatment on the sale.
Veilside,
Two big things that people try to protect themselves from:
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Legal liabililty - the creation of LLC and other holding entities to limit legal risk to that entity in an attempt to shield assets from legal liability.
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Capital Gains Tax liability - (mainly from the sale of property- not about holding entity) - There are ways to sell assets and ‘defer’ capital gains tax (or avoid in the instance of a section 121 exchange)… protecting the gain, if even for a little time.
a. Section 121 exchange - Primary Residence Property Sale - generally homeowners selling their primary property are allowed a gain of 250K (500K if married) and not be taxed- not a pro here, but there are some ins/outs and exceptions
b. 1031 exchange - Investment Property Sale - On the sale of an investment property, investors may reinvest proceeds from a sale of an investment property into another investment property. The goal being to ‘defer’ capital gains tax, growing your real estate investment portfolio (like a 401K defers gains and grows until cashed-in)
As mentioned, there are a few ins and outs to deferring capital gains taxes… exchanges are another way people protect their investment assets
Insurance won’t protect you from capital gains taxes, as mentioned, but is probably another aspect of asset protection, that people discuss for protecting themselves… (I don’t know and would be even more helpless in those waters :'()
1 & 2 are mainly what people try to do to cover there, as Gordo puts quite well, ASSets.
Chris,
The question was “how does an entity protect you from capital gains”. The answer is that it doesn’t.
Section 121 capital gains exclusion is only available to an individual, and only for the individual’s primary residence. If the individual meets the two year rules, then the individual taxpayer can exclude the first $250K in profit from capital gains taxes. Having the property owned by a trust or by a pass-through entity does nothing for the individual that individual ownership does not already provide
1031 exchanges can only be done with investment or business use property. The 1031 exchange defers the capital gains tax and the tax on unrecaptured depreciation for the indiviual owner the same way that it does for the trust and pass through entity. There is no advantage with respect to capital gains to be gained over personal ownership from having your investment property held by a pass through entity