Investing in real estate can be a smart choice for a balanced investment strategy. You can make that choice even more intelligent by enlisting the Fortune Law Firm to help protect your real estate assets. We can help you form Nevada LLC’s to own your properties.
Why Incorporate Your Real Estate?
Real estate can be a good investment, but one that comes with a host of risks and liabilities. If your properties are titled to a person and not a business entity, you are personally liable for damage or losses that may arise from accidents, injuries, interruptions to business or other events.
If one or several of your properties is involved in a lawsuit, your personal assets are at risk, including cars, home, bank accounts, other real estate investments and more. However, you can protect your assets by placing your properties in business entities to create a barrier between you and your assets. This makes it more difficult for a judgment creditor to pursue your personal assets in the event of a lawsuit involving your investment property.
How to Incorporate Your Real Estate
Many lawyers agree the smart way to approach real estate asset protection is to form a Nevada LLC and purchase your real estate in the company's name. By using this strategy, your real estate is the property of your company—not you, personally.
Typically, real estate investors choose to form an LLC rather than a corporation due to the tax benefits. Please consult your accountant for more information.
If you own one real estate investment...
If you own one piece of real estate as an investment, often the strategy is to form a Nevada LLC and purchase your property under that LLC's name. This protects you on two levels: your personal assets are legally separated from your property in the event of a lawsuit aimed against your property, and your property is separated from your personal assets in the event of a lawsuit against you personally.
If you own multiple real estate investments...
Some real estate investors who own multiple properties place ownership of all of their properties under one LLC. While this is preferable to a sole proprietorship, it puts all of your real estate at risk in the event of a legal issue involving one of your properties.
If you own multiple properties, you may wish to consider a slightly different approach. A number of real estate investors have found success by utilizing a multiple-entity strategy, where by each property is placed in a separate LLC. Although this can be costly as each entity is responsible for tax filings, bank accounts, expense records and each has a separate state fee and possible business license fee necessary to conduct business.
This strategy involves forming multiple Nevada LLCs—one for each piece of real estate. (LLCs are used because they are pass-through entities allowing the depreciation schedules to flow through.) Each property is then purchased under one LLC's name, so that each LLC owns one property. Consequently, if one property is involved in a lawsuit, the other properties are out of reach and can continue to produce revenue. Remember you cannot go after Burger king for what McDonald’s did to you. Each entity is its own separate and distinct company.
Another strategy that can be used is forming a Nevada series LLC. A series LLC is composed of an individual series of membership interests. Each series is treated as a separate entity (the debts, liabilities and expenses of one cannot be enforced against another series of the LLC, according to Nevada law), and the series LLC pays one annual $200 fee to the state of Nevada. Think of a Series LLC like one dresser with multiple drawers. One drawer holds your socks, the other your T-shirts and another your underwear. Your socks cannot spill over to your T-Shirts and your T-shirts cannot spill over to your underwear although they are in one dresser. This is how a Series LLC works. One LLC with multiple drawers or compartments, each holding a separate property that are isolated and insulated from the liability of any of the other properties. This allows for one filing fee, one Secretary of State fee, one tax filing, one bank account and so on. If you have two or more properties it is recommended due to costs and expenses that you seek out the Series LLC for you and your real estate investments.
The predominant entity here is a series LLC. The series LLC offers you tax advantages and separates your real estate investments from your personal assets, but each property is titled in the name of a separate series. In most cases it is recommended that you hold your real estate in a Series LLC although the rents are paid to another LLC acting as your own property management company. This way you separate the cash assets of your real estate from the actual tangible property.
Please be advised that while there are several benefits to forming a Nevada Series LLC, there are a few potential drawbacks. The first is that the legal separation of the assets and liabilities of each series is tested only in the Nevada courts of law. Banks are also largely unfamiliar with the structure, and can have difficulty understanding that each series can open a bank account although it does not necessarily have to. Although Nevada series LLCs pay one annual fee of $200 to Nevada, the U.S. federal tax treatment for individual series is typically regarded as a pass through unless another tax election is chosen. Many attorneys and tax professionals are not familiar with this structure and come to us with questions or to structure their clients on their behalf.
These are only two of the strategies you can use to protect your real estate investments and personal assets but they are really good ones. Contact us directly to see which structure is best for you and to tailor a plan to specifically meet your individual investing needs.