If you are a landlord, you probably understand that there’s an inherent risk of legal liability any time that you choose to rent out your property to tenants. There are a number of risks that are foreseeable, and can be insured against, but insurance can’t protect against every potential legal risk.
If a tenant is injured on your property and chooses to sue, you could not only lose the property itself, but also your other personal assets as well. Insurance can go a long way towards minimizing the risk of having your assets seized, but an LLC combined with insurance can do even more.
An LLC is a limited liability company, which offers its members the same protections available to owners of a corporation. Assets that are held in LLCs typically give their owners personal liability protection from lawsuits.
Although you may have large amounts of insurance coverage, if some negligent act results in severe injury to a tenant or a guest, the award to the victim could be larger than your insurance coverage. That means your personal assets could be at risk.
For example, you may have $750,000 in liability insurance on your rental home. A dead tree branch falls on your rental home in the middle of the night, hitting a tenant and causing brain damage, which could result in damages to the tenants in the millions of dollars.
In that case, your personal assets, including your home or other properties, your bank accounts, your vehicles, your investments, etc.) would be at risk to satisfy the damages.
However, if your home were owned by an LLC, the LLC would be liable for the damages, and the LLC’s assets could be at risk, but an individual member of the LLC would have protection for his or her personal assets.
Another benefit of an LLC in California is that it can protect against claims by creditors of members of the LLC. If an LLC is in place, the creditors of a member of the LLC cannot attach the assets owned by the LLC.
For example, if you and a friend own a rental house together, and your friend drives while intoxicated one night and hits someone, the accident victim cannot seize the rental house if it is owned by an LLC.
If it is owned in the names of you and your friend, your friend’s half of the house could be at risk.
If you own more than one rental property, you should consider placing each one into a separate LLC. If you place them all into one LLC, and there is a problem with one of the properties, all of the properties are potentially at risk.
There are also tax advantages to an LLC when compared with a C-corporation and an S-corporation. All three forms of ownership offer protection from liability, LLCs are given pass-through taxation.
This means that owners get to report their share of the income or losses from their LLCs on their individual tax returns.
In contrast, a C-corporation is taxed at both the corporate level and the personal level. S-corporations are not double taxed, but they face other tax problems when real estate is involved.
Although LLCs can be great for rental property, personal residences should never be placed in an LLC. If a personal residence is placed in an LLC, the owner loses the loss of the capital gain exclusion on the sale of the home.
Therefore, if you own rental real estate, you should strongly consider placing it into an LLC. If you are in the Oakland, Walnut Creek, East Bay, or elsewhere in the San Francisco Bay Area, call Oakland-Walnut Creek real estate attorney Robert Levy at 510-465-0025.
He can help advise you on whether or not an LLC would be best for your rental property, and how to go about setting one up. Call him today to learn more or to schedule a free consultation.