Clint Coons discusses different ways to protect your personal residence from creditors looking to go after your assets. Find out how these strategies work so that it makes you appear like your property is worthless (or is not in your name).
Clint discusses how both equity stripping and land trusts can help protect your personal residence from potential problems with your real estate investing business.
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.
Clint: Hi, Clint Coombs here of Anderson Business Advisors, and the host of the REI Classroom. Today, we’re going to be talking about protecting your personal residence.
Mike: This show was sponsored by passiverental.com.
Clint: Now, as you know, protecting your rental real estate is very important and we use limited liability companies and land trusts to protect our rental real estate because of all the threats that are associated with owning rental real estate. But oftentimes, people are unsure how to go about protecting their personal residence because there are many threats out there that could affect you personally. I mean, let’s face it. If you manage your property, you could always be sued for being negligent. And so that judgment would attach to you. And if you own your personal residence in your own name, or if it has a lot of equity in it, your creditor is going to zero in on that equity.
And they could do one or two things. They could come after you and force you to sell your property, or another way, they could just file a lien against you, file that judgment in the county where your personal residence is located. And then, when you try to sell your house, you try to refinance that property, your creditor’s going to get paid. So how do we go about making it so that creditors don’t want to come after our personal residence?
Well, the first strategy is to make it appear worthless. I mean, make it appear as if you have no equity available so it’s never going to happen, they’re never going to get paid. The easiest way to do this is to go to your bank and take out a home equity line of credit. This would then appear as a lien against your property and it will suck up a considerable portion of the equity in your property. So a creditor then might assume that they were coming after you that there’s nothing there to go after.
Now, another option on top of that is to consider setting up a land trust. Now, as I stated, if a creditor obtains a judgment against you, they’re going to record it in the county where your property is located. Well, that judgment’s going to attach to you individually. But guess what? If your property’s in a land trust, you don’t own it in your own name. So if somebody does sue you and they get this judgment against you, it’s not going to attach to your personal residence because you don’t own it individually. So the land trust is a great way to take your name off the title.
Now, if you want to take it to a little higher level of asset protection, then what you want to do is take that land trust, and put it into a limited liability company. Just like we do with rental real estate, you can toss that land trust into an LLC. However, you want to make sure that that LLC is set up as a disregarded LLC for tax purposes because we do not want to jeopardize your 121 capital gains exclusion when you go to sell your property. So that is a great way to protect your house.
Now, if you want to throw on your own strategy, such as doing a friendly lien where you have maybe a Wyoming or a Nevada LLC set up, and then you file your own deed of trust against your property, that’s another way to add another layer to make it appear as if your property’s fully encumbered or over-encumbered, again, to make the creditors go away.
Now, one thing I want to leave you with here. If you live in a state such as Florida or Texas that has an unlimited homestead exemption, you shouldn’t need to utilize any of these techniques the way I’ve described because your house is already protected. So be sure to check with your state’s laws or with a local attorney about your homestead laws before you go about implementing one of these strategies. My name’s Clint Coons with Anderson Business Advisors.
Mike: passiverental.com is your source for turnkey done-for-you rental properties. If you’d like to be an investor and not a landlord, please visit passiverental.com to learn how to purchase cash flowing, professionally managed rental properties in the hottest rental markets across the country. We can also help connect you with financing for your next property. Invest the easy way today and get started by visiting passiverental.com.
Please note, the views and the opinions expressed by the individuals in this program do not necessarily reflect those of flipnerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.
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