Many people own rental property. Some own residential property and some own commercial property. But the risk of a tenant or other third party injuring themselves and suing may be high.
There is a risk in owning rental property in your name. If someone gets injured in rental property owned in your name, they will likely sue you because you are the owner. You are responsible for paying the judgment. To the extent your liability insurance does not cover the judgment, or to the extent someone successfully sues you for something that is excluded from your insurance coverage, then you are personally responsible for that debt. A creditor can take your rental property, other property you may have, your home, your bank accounts and investments, any inheritance you may have received, your business, and other assets you own.
However, you'll likely have more liability protection if you own your rental property inside of a limited liability company (LLC). When you own your rental property inside of an LLC, then, when someone gets injured, they will sue the owner of the property (the LLC). The worst thing that could happen is that you lose the assets of that LLC, but all of your other personal assets would be protected.
Here are five things to consider before forming your LLC and transferring your rental property into it:
(1) Taxes. An LLC can be a pass-through entity. You will continue to report LLC income on your personal return.
(2) Insurance. Check with your liability insurance provider before transferring rental property to your LLC to determine whether you will need a commercial policy.
(3) Gifting. If you want to give interests in your rental property to children, heirs, or donees, it's easier to do it by giving membership interests in your LLC, instead of giving them undivided interests in real estate.
(4) Put LLC in Living Trust. If you want the transfer of your membership interest in your LLC to pass to your heirs outside of probate when you die, you can transfer your LLC membership interest to your Living Trust during your lifetime. When you die, your Successor Trustee can immediately transfer your LLC interest to your trust beneciaries.
(5) One or Multiple LLCs. If you own multiple rental properties, you must decide whether you want all of your rental properties in one LLC, or whether you want the increased liability protection that comes from owning different properties in different LLCs.
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