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Real Estate Trust - Another Way to Protect Your Investments

By Brian Kline | October 29, 2014

Investing in real estate can be done in many different ways. But like any business, it doesn't come without risk. Titling investment properties in a real estate trust can provide some protection for your business when done correctly. How much protection a real estate trust offers depends on how your overall business is structured and your particular state trust laws. A good structure is only titling the property through a real estate trust and managing tenants through a Limited Liability Company (LLC) that the real estate trust hires as a property manger.

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 wanders onto your property.

© aihumnoi -

© aihumnoi -

Your Real Estate Trust Doubles Your Protection

Holding your investments in 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 conditions 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.

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 once it has been titled in your name. A few states could charge you money for:

  • Property tax reassessment.
  • Transfer taxes.
  • Loss of personal use tax breaks for the sale of the property.
  • Loss of homestead rights if it was once 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.

Brian KlineAuthor bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 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 in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.

Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years with articles listed on Yahoo Finance, Benzinga, and uRBN. Brian is a regular contributor at Realty Biz News
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