If you’re the owner of secondary or rental property, then you should consider how best to protect your personal assets from liability. It may be wise to deed property to one or more LLCs, corporations or trusts. This article will examine the potential liability of landowners, various forms of asset protection and the pros and cons of conveying real estate into another entity.
Understanding Premises Liability
Premises Liability is the concept that the owner of a piece of property can be held liable for injuries caused by unsafe or defective conditions on the property.
Premises liability can come in many forms, such as:
- slip and fall cases
- inadequate maintenance of the premises
- defective conditions on the premises
- inadequate building security leading to injury or assault
- elevator and escalator accidents
- dog bites
- swimming pool accidents
- amusement park accidents
- water leaks or flooding
Keep in mind that an injury sustained on someone else’s property—even if the property was in an unsafe condition—does not automatically prove that the property owner was negligent.
In order to succeed in premises liability case, the injured party has to prove that the property owner knew—or should have known—that the premises were in an unsafe condition and failed to take proper action to remedy the problem.
The best way to shield personal assets from liability occurring on secondary or rental property is to convey the property to a Limited Liability Company (LLC), a corporation or trust. Each of these entities would exist to hold and manage your real estate investments separate and apart from your other personal assets. In some instances it is advantageous to create multiple LLCs, corporations or trusts to further protect assets.
How does this work?
Consider the tenant who throws a big party one weekend. A guest slips during the party and then sues you, the owner, to recover damages for his injuries. If you own the property in your own name, you must personally defend the lawsuit. All of your personal assets are now in jeopardy should the guest succeed in claims.
Owning the property in an LLC, corporation or trust gives you much more personal protection. In most instances the holding entity would be responsible for defending suit and your personal assets would be protected.
The Pros and Cons
Asset Protection. People will sue for anything these days and as soon as someone knows you own property in your own name, you are an immediate target. If you do not have one or more holding companies, all of your personal assets may be at risk if you are sued.
Tax Advantages. Putting property in an LLC can offer options of pass-through taxation, avoidance of double-taxation, or if you have the LLC taxed as an S-Corp you may be able to use that to reduce self-employment and other taxes. All of these benefits will be tailored to your specific structure and situation.
Cost. The cost of forming a new entity and registering that entity may dig into your cash flow. A CPA or other tax preparer will likely charge more for handling the tax aspects related to an LLC, corporation or trust. A word of warning: While the initial cost of creating an LLC, corporation or trust may seem high, be wary of online vendors offering you discounted rates to create a new entity. These one-stop shops may work from time-to-time, but can also create more problems for you that could have been avoided by consulting with a real-life attorney in the first place.
Financing. Many lenders will not lend to LLCs or small corporations without a personal guaranty. Be aware that if you require financing, you will likely need to sign a personal guaranty to induce a bank to lend money.
Non-Foolproof Asset Protection. There are situations where an LLC may not protect you from liability. Be sure to understand what those are.
Triggering Due-on-Sale Clauses. This one only matters if you already own a financed property. Oftentimes investors will buy properties under their personal name and then convey the property to a holding company. There is no problem in doing so, except that , you may trigger the “due-on-sale” clause in your loan agreement meaning you would owe the remainder of the loan immediately if the bank were to become aware of the transfer. Prior to conveying real property into a new entity you should consult your lender about any additional requirements that may be necessary.
Conveying real property into an LLC, corporation or trust requires the skill of a trained attorney. If you’d like to learn more about these methods of liability protection, contact the attorneys of Stanko, Senter & Mitchell today.