Structuring your real estate business can be done in many different ways. Like any business, it never comes completely without risk. How you title your properties can determine how much protection your business has. How much protection a real estate trust provides depends on the overall structure of your business. You should consult with a real estate attorney in your state to learn what offers the most protection for you.
A good structure is only titling the property through a real estate trust and managing tenants through a LLC that the real estate trust hires as a property manger. You can own both the trust and the LLC. There is always the possibility of a lawsuit in today’s litigious society. It could come from a money partner, a tenant, or even a stranger that just happens to be on your investment property.
A Real Estate Trust Offers Double Protection
By holding your property is a real estate trust and running your business as an LLC offers you double protection from lawsuits. Generally, the real estate trust is only responsible for the condition of the property. It would still be possible for the trust to be sued for something such as a person falling through a rotten floor. However, the rental income from the property is being held by the property management LLC, not the real estate trust. Therefore, total damages are limited to the value of the investment property.
Unless the property management LLC can be proven to have knowingly and intentionally rented a property in bad repair, it would likely be found faultless in a lawsuit. It also works the other way. If the property management LLC was unable to repay a large security deposit, only the LLC could be held liable, not the real estate trust.
This business structure offers you better financial protection than operating the investment property as a single business entity. However, there are possible tax drawbacks to this arrangement. The real estate trust offers tax benefits that the LLC does not. It’s always a good idea to get the advice of an accountant or tax attorney to learn the best business structure for your particular situation.
When to Title Your Investment in a Real Estate Trust
You want to title your investment in a real estate trust from the very beginning. However, you may have it in your personal name when you discover the advantages of holding it in a real estate trust. Have no fear. It can still be transferred to a real estate trust without financial consequences to you – in most states.
Check your state laws before transferring an investment into a real estate trust if it was originally titled in your name. A few states could cost you money for:
- Property tax reassessment.
- Transfer taxes.
- Loss of tax breaks for the sale of the property.
- Loss of homestead rights if it’s your personal residence.
- Trigger a due on sale clause in a mortgage.
These are very rare. However, I can’t know the laws in all of the states. Check with a professional before making an investment change that you could possibly regret.
Please leave a comment if this article was helpful or if you have a question.
Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.