All Forum Posts by: Savannah Wallace

Hi Jim, 

For any investment of real estate, I'm going to recommend placing each property into an LLC for asset protection.

LLCs can help shield you from personal liability if a tenant were to ever sue as well as offer protection against creditors in case of a personal judgment through charging order protection, when the LLC has been structured appropriately. With the property in an LLC if someone were to sue the property the could only go after the assets in the LLC and not anything else (assuming you did not guarantee anything personally and the corporate veil has not been pierced). The rest of your properties would be shielded.

Also, depending on the structure, you can keep your name off the public record as the owner of the property and even as part of the LLC. For my clients I recommend that they place the properties in an LLC that has been formed in the state where the property is located and have the member of that LLC be a Wyoming LLC. This provides for both anonymity as well as charging order protection. Keeping your name off the public record as the owner makes you less attractive to sue, as it will look like you don't own anything.

The decision of whether to establish multiple LLCs, especially for each individual property, is a matter of individual risk tolerance and a cost-benefit analysis. While each LLC provides a dedicated layer of protection for a specific asset, there are ongoing costs associated with maintaining an LLC, such as annual registration fees, which can vary by state and may amount to a few hundred dollars per year. The cumulative cost of maintaining several LLCs should be weighed against the increased level of asset protection afforded by each separate entity. For my clients, I do believe that the benefit outweighs the costs and recommend utilizing separate LLCs.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, or financial advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

Hi Ivy, 

Your accountant is likely suggesting this approach to avoid the need for filing IRS Form 1065, the partnership tax return. When an LLC is treated as a disregarded entity—meaning it has only one owner—it does not file its own tax return. Instead, all income and expenses are reported directly on the owner's individual tax return.

If you reside in a community property state, both spouses can own the LLC together and, under IRS rules, the entity may still be treated as a disregarded entity for federal tax purposes.

You mentioned that your LLC holds both rental properties and properties for flipping. I generally advise clients against combining passive investments (such as long-term rentals) with active business activities (such as flipping) within the same entity. This is because income from flipping is considered active and is subject to self-employment tax (15.3%), while long-term rental income is generally not. If both types of income are mixed in a single entity, the IRS may classify all the income as active, potentially subjecting your rental income to self-employment tax as well.

To minimize self-employment taxes, it is important to keep active (flipping) and passive (rental) income streams in separate entities. If your active business income exceeds $30,000–$40,000, you might consider operating the active side through an S-corporation, which can help reduce self-employment tax liability by allowing you to split income between salary and distributions.

Lastly, separating these activities also helps protect your passive investments from liabilities arising from the active business. Keeping them distinct is a strategy for both tax efficiency and asset protection.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, or financial advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

Mohamed's advice highlights a fundamental yet often overlooked aspect of asset protection when utilizing entity structures for investments: the necessity of maintaining financial separation. While establishing distinct legal entities is a good first step in shielding assets from potential liabilities, this protection can be easily undermined by commingling funds.

Commingling creates a significant vulnerability in an asset protection strategy. If you deposit the rental income from one property into the same bank account used for another property's expenses, or even your personal expenses, you have blurred the lines between these legally distinct entities. A savvy plaintiff's attorney can exploit this commingling to argue in court that the “corporate veil” has been pierced and that the assets held within one entity should be accessible to satisfy a judgment against you personally or against one of your other entities.

Like Mohamed mentioned, beyond separate bank accounts, meticulous bookkeeping is equally essential. Accurate and distinct financial records for each entity demonstrate that you are treating them as genuinely separate business operations. Failing to maintain these records can further support an argument that the entities are not truly independent.

Neglecting these seemingly simple steps can inadvertently negate the very protection that you sought to establish in the first place.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, or financial advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

I recommend utilizing separate LLCs that have been formed in the state where the property is located and have the member of that LLC be a Wyoming LLC. This provides for asset protection, anonymity as well as charging order protection. Liability is separated out in this structure, so should you have a tenant sue one property, your others won't be impacted.

The decision of whether to establish multiple LLCs, especially for each individual property, is a matter of individual risk tolerance and a cost-benefit analysis. While each LLC provides a dedicated layer of protection for a specific asset, there are ongoing costs associated with maintaining an LLC, such as annual registration fees, which can vary by state and may amount to a few hundred dollars per year. The cumulative cost of maintaining several LLCs should be weighed against the increased level of asset protection afforded by each separate entity. For my clients, I do believe that the benefit outweighs the cost and recommend utilizing separate LLCs.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, or financial advice. No attorney-client, fiduciary, or professional relationship is established through this communication..

Hello AJ, 

When I have a client decide to conclude one business venture and start a new one, I recommend the formal dissolution of the LLC associated with the discontinued business and the establishment of an entirely new LLC for the new endeavor. This recommendation is not merely a procedural formality; it serves as a significant safeguard against potential future complications, primarily concerning liability. Maintaining the same legal entity for a fundamentally different business carries inherent risks. Any outstanding obligations, debts, or potential legal actions stemming from the operations of the previous business could still attach to the LLC. This means that the newly formed business, operating under the same legal structure, could find itself entangled in the unresolved issues of the old business. By dissolving the old LLC, we effectively draw a clear line, legally separating the liabilities of the past business from the assets and operations of the new one.

Good luck with your new real estate investments! 

Note: This information is for educational and informational purposes only and does not constitute legal, tax, or financial advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

Hello Kwanza, 

Connecting with the National Alliance for Recovery Residences (NARR) is a good start. I’d also recommend finding local nonprofits that may be providing housing to these groups. Many clients I assist establish nonprofits to provide housing for individuals with housing insecurities, such as veterans, the disabled, and those overcoming addictions. I know many founders of nonprofits are eager to share their insights and experiences to help people get involved. 

Hi Shannon, 

I would agree with Charles. Purchasing an existing LLC carries the inherent risk of assuming any pre-existing liabilities, which could include undisclosed lawsuits, outstanding debts, or other financial obligations. Before acquiring an LLC, thorough due diligence is crucial to uncover any such potential exposures. This process might involve a comprehensive review of the LLC's financial records, legal history, and operational agreements.

If the potential liabilities are a concern or if a comprehensive due diligence process is not feasible, an alternative strategy would be to directly purchase the desired property and subsequently transfer its ownership into a newly formed LLC. This strategy effectively achieves the goal of holding the property within an LLC structure to achieve asset protection while mitigating the risks associated with acquiring an entity with an unknown liability history.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, or financial advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

Hello Kashyap,

1. A trust by itself does not provide asset protection which is why I recommend to my clients to also utilize an LLC when holding property. Land trusts can be great "smokescreens" and help keep your name off the public record, but they don't provide the same protection from personal liability that you get with an LLC.

2. A land trust can have multiple beneficial owners. How I typically structure my clients is to have the property deeded into the land trust with an LLC as the beneficiary so as to obtain asset protection. I don't use a land trust in every structure; whether or not it will be truly helpful depends on each unique client situation.

3. Securing financing for a property held within an entity presents unique challenges due to a limited pool of willing lenders. In situations where financing is necessary for a property acquisition, a common strategy I advise clients to consider is to initially close the purchase in their personal name. Following the closing, the property can then be transferred into the entity structure. While traditional financing avenues may be restricted for entities, alternative options such as SBA loans or engaging with hard money lenders may be viable. It's important to note that the majority of conventional lenders typically prefer the property to be held in the individual's name. Alternatively, if the LLC lacks a substantial operating history, lenders may require a personal guarantee from the entity's principals as a condition for loan approval

4. While some lenders offer flexibility and may approve loans based on the documentation of your associated entities, this is particularly relevant when your business lacks an established credit history. In such cases, securing a loan directly under the LLC name can be challenging. Even if an LLC loan is approved without a substantial business credit profile, lenders will almost certainly require a personal guarantee. This personal guarantee essentially shifts the liability for the loan repayment from the business to the individual, meaning your personal assets could be at risk if the LLC defaults.

5. You will likely need to take the property out of the entity to do a refinance.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, or financial advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

Hi Scott, 

I have a lot of clients who utilize this very strategy and this is generally the advice I provide when they are first starting out.

I recommend setting up an LLC under your SDIRA—often called a "checkbook control" LLC. This structure offers several advantages including asset protection, privacy (your IRA isn't listed on the deed as the owner) and faster transactions as you don't have to wait for custodian approval. Note that the SDIRA must own 100% of the LLC. You cannot personally own or benefit from the LLC, and all income/expenses must go through the SDIRA.

If your SDIRA invests in real estate using a loan, be aware that this can generate UBIT as a result of UDFI (Unrelated debt-financed income). If you want to avoid UBIT on leveraged real estate, consider using a Solo 401(k) instead of an IRA, as Solo 401(k)s are generally exempt from UDFI on real estate investments. Or use only non-recourse loans.

We know that the IRS has strict rules regarding prohibited transactions and self-dealing. You cannot buy, sell, or lease the property to or from your SDIRA, nor can you personally use the property. You cannot take a salary, directly handle negotiations, or provide services (like repairs or management) to the property. All work must be performed by third parties, and all payments must come from the SDIRA. All income generated by the property must go back into the SDIRA, and all expenses must be paid from the SDIRA

Good luck with this investing strategy!

Note: This information is for educational and informational purposes only and does not constitute legal, tax, or financial advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

Hi Brad, 

I have a lot of clients who utilize their SDIRAs to invest in real estate, and this is generally the advice I provide when they are first starting out.

I've found IRA Club to be a good resource for my clients to assist in setting up their SDIRA.

As far as structuring real estate investments with your SDIRA, I recommend setting up an LLC under your SDIRA—often called a "checkbook control" LLC. This structure offers several advantages including asset protection, privacy (your IRA isn't listed on the deed as the owner) and faster transactions as you don't have to wait for custodian approval. Note that the SDIRA must own 100% of the LLC. You cannot personally own or benefit from the LLC, and all income/expenses must go through the SDIRA.

If you will be obtaining financing, you'll need to obtain a non-recourse loan when using your SDIRA to invest in real estate, otherwise, you'll generate UBIT as a result of UDFI (Unrelated debt-financed income). Another strategy to consider in the future is using a Solo 401(k) instead of an IRA, as Solo 401(k)s are generally exempt from UDFI on real estate investments.

We know that the IRS has strict rules regarding prohibited transactions and self-dealing. You cannot buy, sell, or lease the property to or from your SDIRA, nor can you personally use the property. You cannot take a salary, directly handle negotiations, or provide services (like repairs or management) to the property. All work must be performed by third parties, and all payments must come from the SDIRA. All income generated by the property must go back into the SDIRA, and all expenses must be paid from the SDIRA

Good luck with your investments!

Note: This information is for educational and informational purposes only and does not constitute legal, tax, or financial advice. No attorney-client, fiduciary, or professional relationship is established through this communication.