This week, Devin and John talk about the ways to protect your real estate interests.
John starts off by saying that you can use business entities for asset protection, and you can use trusts for asset protection. You should use business entities to protect business assets, and trusts to protect personal assets.
Devin asks John how he should protect himself from the liability of owning rental properties.
John explains that you have to protect yourself in two ways: You want to protect your business from your personal issues, and you want to protect your personal life from your business issues. John likens it to building a wall around the property: if liability is created inside the wall, it can’t get out, and if liability is created outside the wall, it can’t get it.
John shares a thought that resonates with him: “Forming the business entity to hold the rental property is the cheapest insurance you will ever buy.” You’ll pay for the cost to set it up, and you might have a small annual fee, and possibly the cost of filing an additional tax return.
John suggests that a Limited Liability Company, also called as an LLC, can be a good way to create liability protection. He also shows why you may want to file a separate tax return, a Form 1065, for your LLC, as a way to protect yourself.
Then Devin asks, if you buy a second property, would you want to put that second property into your existing property’s LLC? John would suggest that you want to keep a wall between the two properties, so that the problems of one property won’t affect the other property.
In many states, your only option might be to create another LLC. Some states have created a solution, called a series LLC. A series LLC is a larger structure, that has multiple units within it.
What happens when your property is located in a different state from where you live? Estate entity can operate in other states. You may have some additional paperwork, and there may some conflicts John’s final recommendation for this subject is to check with an attorney who lives in your area and can navigate the specific laws and options that are available.
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