Today, Marc Schwartz goes over asset protection and how to not only protect your assets, but to keep your name off public records.
Discover the benefits of an LLC for real estate investors and also find out the different types of trusts.
Mike: Welcome back to the FlipNerd.com REI Classroom where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Mark: Hi, my name is Mark Schwartz and I’m from the law offices of Mark Schwartz and I am going to be your teacher today for the, I’m sorry, REI Classroom subject on asset protection.
Mike: This REI Classroom Real Estate lesson is sponsored by AceBusinessFunding.com.
Mark: Now for those of you who are purchasing real estate, congratulations. I think that real estate is the best investment that you could make, but you got to take some precautionary steps. And I believe that protecting your other assets is one of those precautionary steps.
Now what are the options when it comes to owning real estate? Well one is, and the simplest is, you buy the real estate in your own name. The advantages to that are that it’s simple, straightforward and understandable. The disadvantages are one, everyone knows what you own. And two, if anything ever goes wrong in your life and you get sued, trust me I know people who are getting sued, your assets are protected, I mean I’m sorry, are exposed, not just the property that you purchased.
So let’s talk about some of the different areas that you can, or some of the different vehicles that you can use in order to protect your assets. Now a lot of you may have heard of an LLC. An LLC stands for a limited liability company. And LLC’s are by far the most common way of owning real estate outside of someone’s individual name. An LLC will put up a firewall between your real estate asset and everything else you own.
So in the catastrophic event where somebody has a really big loss and they want to sue the owner of the property, because the accident or injury occurred on the property, the LLC will limit the exposure to that one property. Which can still be devastating, but at least the rest of your property is still protected.
Now there are other legal entities out there, corporations, partnerships, limited partnerships, and I want to talk just briefly about that. For partnerships you have to remember that it’s for more than one person, as the term implies, and there is limited liability. So a general partnership has no liability, where as a limited partnership has limited liability only for the limited partners. So keep that in mind if you’re ever going to be doing a real estate investment and you’re not the general partner.
Corporations are a very bad thing to own real estate, mostly having to do with tax disadvantages. And I’m not going to bore you with all of those things, but just keep in mind that if you really want to protect yourself an LLC is the way to do it.
Now like anything in life LLC’s are not perfect. LLC’s have to be maintained. So you have to go and open up a separate bank account, you have to go and file separate tax returns often times.
In California, where I am, there is an $800 fee for having an LLC and that has to be paid regardless of whether the property makes money or not. And in California, because it doesn’t have enough money, has what is called a gross revenue tax. So if your real estate investment makes too much money, well according to the government, you’re going to have to pay an additional fee on top of that $800. But I like to think of it as an insurance policy.
Now there are also some other disadvantages for owning a property and LLC, mostly having to do with estate planning. I’m not going to touch on that too much, but if you own a property and an LLC you’re not going to be able to pass along the property tax basis to your children and grandchildren. That’s only in California, I don’t know if that applies elsewhere in the country, but you really should look into it.
Another thing that I have a lot of clients who ask me about is a living trust or a land trust. Now we’re not going to go into estate planning, as I said, but keep in mind that neither the living trust nor the land trust provide any sort of asset protection. They are only for avoiding probate and keeping your name private. I have a few celebrity clients who have their property in land trust to make sure that the paparazzi don’t go snooping to make sure that they live there.
So I hope I’ve given you just a brief overview of asset protection. I think it’s something that you absolutely positively must consider whenever you’re owning real estate, and whatever you choose at least understand the consequences. Again, my name is Mark Schwartz, I’m from the law offices of me and I hope to see you guys again soon, thanks.
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