LLCs, asset protection, and taxes for rental properties

[Andrew Pappas]

I've read a lot about the asset protection plan of buying a property in your personal name with conventional financing, then quit claim the property into their LLC. My property manager told me he's seen people do this, only to have the corporate veil easily pierced in a lawsuit because the mortgage is still under the individual's personal name. Furthermore, it's easy to see the sale record of a property or deed transfer on the county web site, so anyone can find the true owner of the property. With this in mind, is it worth the money to use LLCs for rental property holdings from an asset protection standpoint?

Also, is it worth filing a separate tax return for an LLC with rental property holdings, or is it fine to have it flow through your personal return? Are their any tax advantages or asset protection advantages (for example would a judge ask to see separate tax returns in a lawsuit against your LLC)?

It cost me an extra $700 to file separately for my LLC, so I'm just wondering if it's worth it.

Thank you!

[Edward B.]

@Andrew Pappas,

Your property manager has no idea what he is talking about and is probably just parroting something he heard once. The corporate veil of an LLC is not easily pierced and it is not pierced solely because you have mortgages in your name on properties deeded to an LLC. It takes much more than just that.

LLCs can offer some anonymity, but I have found it to be very difficult to get full anonymity. To do so would make it extremely painful to run your business effectively. The true owner of the property is the LLC, it is a separate legal entity from yourself. But it is fairly easy for someone to find out your ties to the LLC with just a little bit of digging. Especially in North Carolina. For example, I just searched your name on the North Carolina Secretary of State site and found your company (I'll give you a hint, it has your initials) and much much more. Scary isn't it. I could have done the same thing if I just had your LLC name as well. There are some steps you could take to make it a little less obvious, but like I said, if someone really wanted to figure it out they probably could no matter what you did.

In terms of asset protection, I firmly believe it is worth separating your assets into different legal entities. The law is on your side and as long as you aren't doing anything egregious or outright illegal your protection should hold up. I also believe that it discourages a lot of trivial and frivolous would be litigants. And I believe that if you are in business, you should be doing it separately from your personal life. That's just me. I pay the price. But I don't go overboard on anonymity. I don't have ALL of my property in trusts, I don't have a Nevada LLC with nominee agents, I don't have anything offshore. At least not yet. :)

In terms of taxes, I have thought of filing separately so that my LLCs do not show up on my personal return but I'm not sure why or that it is worth the expense. My last lender pointed out that if you reported significant gains or losses on a K-1 he would want to see those returns anyway. And the loans would show up on the credit pull. And even if the loans were in the name of the LLC but personally guaranteed you would have to disclose it anyway.

So to sum up that diatribe. LLCs = yes. Crazy Nevada/Nexus island setup = no. Benefit to filing separately = debatable but probably not as good as you may think.