Rental property can be a good investment, and that investment can benefit from protections of an LLC. Owning property and renting it out can be a good way to make money. It is also a relatively safe long term investment. Of course, owning and leasing out property means some degree of risk. Many people may not be prepared to deal with the potential risk. If you do own potential rental property, it may be time to start thinking about some asset protection strategies.
You may not think of yourself as one, but as soon as you have a tenant, you are a landlord. That means that you can be sued the same way any landlord can. Lawsuits can come from tenants with disputes over contractual and rent related issues. Third parties such as any guests who come onto the property and are injured can also pursue lawsuits.
The Protections of an LLC
The last thing you want is to have to worry about your personal assets being taken as a result of a lawsuit. That can arise from many issues, for example, someone who is injured when slipping on your driveway, or a contractor who thinks he is owed money for repairs. You could get insurance, but your protection is limited by the amount of the policy. Another concern is whether the insurance company decides that your policy covers the loss.
One strategy to protect your rental property investment is to make sure that the property is owned by a limited liability company (LLC). The rental property protections of an LLC are many. If there is a judgment against the LLC, the property itself (and anything else owned by the LLC, such as bank accounts) may be subject to being taken to satisfy the judgment. But if you respect the LLC formalities (see intermingling discussion below), your personal property and assets can be completely protected from being taken.
Another benefit is that you can name family members as members of the LLC. You can even have a succession plan to pass along your interest in the property (and LLC) to those you want to have it.
1031 Exchanges
As an added benefit, the property may qualify for a 1031 exchange. This tax code provision exempts taxes on the increase in value of real property. A key stipulation is that the proceeds must be put into similar property. This means that if you ever want to upgrade to another property, you can do so without paying taxes on the increased value of the property you sold.
It is important to be careful to avoid intermingling the LLC’s assets with your personal assets. This can void the asset protection that an LLC provides. For example, you should avoid having the LLC pay for your personal expenses and vice versa. You must make sure your assets and the LLC’s assets are kept separately.
Questions about asset protection or about your small business? The Colorado employment and business law attorneys at BBU are here to help you protect yourself and your business.