liability of buying renovation materials

9 Replies

I'm a newbie investor and heard a rehab gal Robyn Thompson vehemently state one time that she would never buy materials for her renovations because it would open her up to being considered as a GC/employer if ever sued by an injured worker and another investor she knew had their wealth wiped out as a consequence of this. Does anybody here have any great insight into this/options to mitigate such liability? Before the suggestion gets made of placing investment properties in separate land trusts or separate LLCs...One difficult consideration Memphis imposes is something called Hall tax which imposes a 6% tax on the investment proceeds of entities like LLCs & trusts but not properties held by an individual (If I understood a lawyer correctly).

So are there insurance offerings that address this liability and a person would just buy sufficient insurance coverage? Your insight is most appreciated!

Yes, Robyn Thompson likes to tell that story about the roofer. While she is correct that purchasing materials is an indication of an employer/employee relationship, the IRS will look a the entire picture to determine the nature of the relationship, not just who buys the materials.

In fact, I have an old BP blog post that details many of the things the IRS will examine to determine employee vs contractor, and while im not an attorney or tax professional,I imagine that if you, by and large, treat the person as contractor and not an employee, just the act of buying materials won't negate that.

In fact, that blog post was inspired by Robyn's story...

I'll try to dig up that blog post when I get back to a computer...

EDIT: Here you go:

Totally helpful J Scott. Thank you!

@Daniel L. the lawer is correct about Memphis. individual up to 10 properties.

Altin, thanks for the reaffirmation! I know sometimes people, even lawyers, get it wrong ;)

If you have the money, it's usually preferrable to provide materials. I suppose you can worry about the liabilities you discuss, but real life risks are more along the line of the contractor taking your money and skipping town. Also, the contractor will put a markup on the material. Even when the contractor gets a discuount for bulk, you usually could get materials cheaper on your own after accounting for contractor markup.

@Daniel L. - Your profile says you are an investor in Texas, why the question concern about investing in Memphis? If you are wanting to do projects in Memphis, but live in Texas, then the Hall Tax does not apply to you unless you plan on living in Memphis while doing your projects and that amounts to greater than 6 months of the year. Otherwise, it does not apply to you.

@Chris Clothier @ Thanks for the good info...You and your family are amazing! I wish my family had the kind of cohesion for the success of a family business as your family has. Also, thanks for the reminder to update my I just updated it to TN. At present I'm living in TN most of the time so your advice is spot on. Keep up the good work you do with Memphis Invest and your biggerpockets blog. Happy New Years!

Who purchases the materials is a non issue, it is all about the contract between you, the GC and the subs. If you use unlicensed, uninsured subs and don't have a contract... you are asking for major problems. Always use a contract (can borrow from the AGC) and have the sub provide you with a certificate of insurance for general liability, auto and workers' comp. The certificate needs to name you as additional insured with primary wording and a waiver of Subrogation.

@Joe Bertolino That sounds like sound advice from an insurance guy in the know : ) Thanks for your input!

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