Asset Protection: Equity Stripping

6 Replies

Hi BP Community - I have an interesting legal situation that I wanted to hear feedback from before consulting our attorney.

I recently read the book, Loopholes of Real Estate, and there was a section on Equity stripping to protect an asset where you have significant equity built up.

My family owns a home that fits that criteria. We have done the following as preliminary asset protection.

1) 1st Line of Defense - Umbrella Insurance Policy

2) 2nd Line of Defense - Deed of House is in a LLC where the owners both have 50% stakes (giving greater protection than a sole proprietor LLC)

3) 3rd Line of Defense - 50% debt against the property which holds a primary (first) position.

 I feel comfortable with our current protection, but i want to make sure we are minimizing our risk exposure. We still have a significant portion of equity in our home (~$1mm). I am looking for recommendations to lower this equity exposure or comments on Equity stripping. 

One option we are considering is drawing a secure line of credit (HELOC) against our property. We do not have any current plans to use the Line of credit, but having it in place, may be a deterrence from litigation. I am unsure if this will work and want to hear feedback.

What are you thoughts? Any feedback is warmly appreciated. 

Thanks in advance!

Drew 

Hi @Andrew C. ,

Is this property your principal residence or an investment property?  I don't know much about Texas law, but a quick google search showed me that Texas has as homestead law (this is common in a lot of states).  This provides a great deal of legal protection for your principal residence.

I would strongly suggest consulting a Texas asset protection attorney.

@Brian Schmelzlen  

Sorry I forgot to mention, this property is in Boston, MA. It is currently owner occupied but owners will be moving out in July and renting both of the Units. 

Also, I thought I'd mention the homestead laws in MA - I believe they are pretty good (~$500k), but I am under the impression that they don't apply to corporations just individuals.

Usually not a good idea to transfer primary into an entity tax-wise. Especially in Boston where the cap gains 121 exclusion of $500k could come into play.  This decision could cost them $200k in taxes it shouldn't have.

Before renting out my primary for more than 3 years I would definitely take the tax angle into account.  They will lose their primary exclusion if not occupied for 2 of previous 5 years at time of sale.

My DIY approach to equity protection is self-encumbrance. I have a generic sounding corp I use as a mgt co. I slap a deed of trust on my free and clears with my corp as the mortgagee, but check with a pro before doing something like that.

I also lend myself money on cash buys from one of my entities so I can get a refi loan that's not considered 'cash out'.  Reduces seasoning requirements and rate & term  hits. Cheers!

@Steve Vaughan  

Thanks for your feedback. They are willing to bid with the primary exclusion and pass this property down to the next generation. We will be able to avoid all capital gain taxes in the future. 

Thanks for the feed back. I have heard of the lending yourself money approach. 

Originally posted by @Andrew C. :

@Steve Vaughan 

Thanks for your feedback. They are willing to bid with the primary exclusion and pass this property down to the next generation. We will be able to avoid all capital gain taxes in the future. 

Thanks for the feed back. I have heard of the lending yourself money approach. 

 Love seeing people winning out there and passing some down to the next responsible generation.  Use it wisely and stay blessed, Andrew!