Does An LLC Protect Your Rental Properties Equity?

Question

Dear Forum,

My understanding is that an LLC protects your personal assets from being sued by a renter. But what about the equity in the rental property that is under the LLC? Can the renter go after ownership of the actual rental property in the state of California? Any input is appreciated.

Best Regards,

Arjan G. Amiri

Peter Mckernan · Answer

Hello John Amiri

Owning properties in an LLC protects a person from getting sued for all their real estate holdings, or all their assets.  One tip is to keep only a few properties within an LLC and then form another one to place a few other properties within. This will prevent a person from being able to sue someone for their whole net worth. A person would be able to sue one entity, and that's why it's better to spread rentals across different LLCs.

In regards to someone trying to sue for all the equity in a home you can look at the Homestead Exemptions in the state you are looking to purchase property. For example, this exemption is placed for homeowners to keep their homes by keeping a certain amount of equity, which is state dependent. California only allows up to $75,000 in one single property to go untouched from anyone else coming in and trying to take that money through a judgement. Other states are different, for example Texas has an unlimited amount. These are only owner occupied properties. Link below shows all 50 states.

http://www.lawchek.net/resources/forms/que/homeste...

David Dachtera · Answer

John Amiri is entirely correct. The single layer of protection provided by an LLC is not sufficient. Your business entity structure needs to be based on an entity which is not a human person, such as a trust. The trustee's identity is easily discovered. The beneficiary's is not. The basic concept is "control everything, own nothing".

Consult a suitable business attorney for a full discourse. I'm not an attorney and this is not legal advice.

David J Dachtera

"Success is not a destination. Failure is not an event. Success is a process, failure is a choice."- DJ Benedict

Rajeev Kotyan · Answer

John Amiri: Any entity structured and operated correctly protects your personal assets from tenants. With regards to protection from tenants, a lot is based on what your lease agreements, operations, etc. are... When there are any issues between tenants and landlords, the tenants can only bring cases against the owner of the property, and this is where strong tenant lease agreements, which spells out in detail as to who is responsible for what is important... for example, spelling out that a tenant in a single family house is responsible for snow removal from the sidewalk in front of the house in New England is important in the lease agreement, and if they do not do it, you will charge them a fee for doing it on their behalf and they would pay all the fines that may be incurred as a landlord (owner of property).

Robert Seltzer · Answer

Good discussion on this thread.   You should also evaluate how much protection you actually gain from using an LLC given the additional complexities.  There is a school of thought that argues having the right insurance structure in place for your properties is actually more important.  And if done correctly, if you are only holding SFR, there is limited additional value in an LLC.  That being said...discussion this with your CPA and attorney.

Arjan Amiri · Answer

I've also recently read that you can't transfer a property from your name to an LLC because of something called a "due on sale" clause.

Thomas S. · Answer

Something else to keep in mind is that in most jurisdictions the Officers or Directors can still be sued under Tort verdicts. This would be in regards to such things as negligence. Tenants can bring claims against individuals which is why owners must make sure they have adequate insurance coverage.

The owners of properties are not entirely protected simply by placing those properties in a LLC.

Matthew Kreitzer · Answer

Corporations, in most states, cannot claim poor debtor exemptions...

The answer is generally yes, if something is owned by an LLC, a judgment creditor can get at it unless you file for bankruptcy. Consult a local attorney for more information.

Arjan Amiri · Answer

Thank you gentlemen for your feedback. It is greatly appreciated!

Mike Dymski · Answer

Yes they can.  Your property insurance policy will have personal liability protection (with varying amounts of protection at varying premiums).  You can also purchase a commercial umbrella for additional coverage.

Patrick Liska · Answer

Anything that is owned by the LLC. they can go after, which includes the asset property, that is why you never want to have equity in the property, refinance and take the money out, maybe purchase some more properties - under different LLC's

Does An LLC Protect Your Rental Properties Equity?

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