What are the risks using personal name for flip instead of business name?

Question

We bought a property using our personal names on title. I wonder are we taking too much risk?

Due to we encountered a lot of issues, I starting to think of how to protect ourselves.

Silvio Brigliadoro · Answer

You have owned this property for a while now, I would not record  any title changes, specially if your end buyer would be using FHA to finance the purchase. I would just get good liability insurance  at this point and get this property sold, decide how you will take title on your next purchase. How to take title would really depend on what you feel most comfortable with, you really can only minimize your liability exposure. Using a combination of a title holding trust and a corp. can give you many options.

There are many other reasons why you are better off not taking title on your own name, taxes, death would be another, taking title under an entity would avoid probate and other issues depending on your state.

Justin S. · Answer

A lot of flippers in AZ use their own name because they can pull permits without a GC that way.  It may not be the right thing to do but a lot of people do it.

Rob Gillespie · Answer

Chelsy,

I would not do  it for a number of reasons, but Be careful not to get too complicated, it sucks for your tax returns.

Just open an LLC and use your attorney as your agent of record. this will hide you from just about everyone and protect against law suits.

When someone is going to sue you for lead paint, a car wreck, etc.... The first thing an attorney is going to do is look you up on public records to see what you own. If you own a bunch, the attorney will do it on contingency, if you look broke, most likely that plaintiff will need to give up a retainer. This may stop further action.

Laura Alamery · Answer

Yes. Definitely try to buy in an entity name, like an LLC. 
If you have to buy under a personal name for lender's request and guarantee, you should transfer the property to your business entity soon after closing.

Aaron Mazzrillo · Answer

The answer to a question like this should always be 'depends.'

What is your tolerance for risk? What type of insurance do you have? What are your intentions with the property. From my experience, those most concerned with asset protection are the people with the least amount of assets. A local investor has hundreds of houses and apartment bldgs in his own name. I have another investor friend who owns unbelievable amounts of real estate from the ground underneath international franchises at major intersections to mobile home parks with hundreds of units.

I also know investors with 1 house and more corps, LLCs, and trusts than an attorney would know what to do with! As Silvio stated above, if you intend to sell the property soon, your pole is already in the water, why stop fishing now? If you are holding the property long term, a simple title holding trust and good insurance are quite acceptable. If the property has considerable equity, you may consider an LLC.

Account Closed · Answer

Not to put too fine a point on it, the big benefit of using an LLC (taxed as a partnership) for rentals, and an s-corp (or LLC taxed as a corp) for flips is for tax considerations.

A flipper is subject to designated "dealer status", which means he is not afforded the opportunity for an IRC 1031 exchange, regardless of how long he owned the property. The capital gain tax must be paid at the time of sale, even when selling on an installment (seller financing).

Eventually, rental property will be sold and you want to take advantage of the IRC 1031 exchange, so you own that property in an LLC. You can also take advantage of an installment sale (seller financing) to defer capital gain tax.

Thus, put your rental activity in an LLC (taxed as a partnership), and put your flip activity in an s-corp or LLC taxed as a corp. This will avoid contaminating all of your businesses with "dealer status".

Dealer status may also apply to operating as a sole proprietorship (buying/selling in your personal name), so be careful and get expert tax advice.

I am not a lawyer or accountant, so ignore everything I just said and get your own professional advisor.

Michael R. · Answer

I use a s-corp to do my flipping from. The reason I will never by in my own name here is because the city likes to go after owners of properties with code violations. If you own in your name they may issue a warrent for your arrest if you dont fix violations and may go after you financialy as well. If your incorporated you have much greater protection and they might not bother you as much. First 2 houses I owned in my own name but now I have a llc for my hold rentals and s-corp for flips. I would not stress about it on the first deal. If you flip it and do well and want to do another then I would Incorporate.

Shawn Holsapple · Answer

I agree with Rob, you must protect you assets!  In this sue-happy society it's mandatory.
I'm a Rich Dad/Poor Dad believer & they discuss in detail how to set this up to maximize your protection in a couple of the Rich Dad ed books.  Even if you don't like Rich Dad, you should definitely at the least setup a LLC to buy/sell your properties through.

Mindi B. · Answer

You can switch title to LLC after closing, but before you re-sell the property the title has to be switched back to your name. If you are only holding the property for 4-6 months, seems like a lot of extra work. If you have an adequate insurance policy, is an LLC really necessary for flips?

What are the risks using personal name for flip instead of business name?

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