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Protect Your Investment Properties With Proper Entity Structure
Over my extensive career as a real estate CPA, I have met with hundreds of real estate investors. It never ceases to amaze me how many of these successful, intelligent people are clueless when it comes to structuring the ownership of their real estate investments. Let's face it. We live in a litigious world and anyone who has assets is walking around with a bulls-eye on their back. If your real estate investments are held in your personal name and not in an entity such as a limited liability company (LLC), you are begging a rapacious attorney to relieve you of all the investments you worked your butt off to get.
A Real World Story
I met Charlie (not his real name) a few months after I moved back to Connecticut. He was a successful business owner and real estate investor. Charlie owned two apartment buildings, 2 small commercial strip centers, 4 single family rental properties and 7 building lots.
All together, Charlie owned investment real estate worth over 12 million dollars with equity of 7.7 million. Every single piece of real estate Charlie owned was in his personal name.
What Could Have Happened IF
One cold night in early winter, one of Charlie's tenants in his single family houses turned on his heat. The furnace was broken and leaking carbon monoxide. Charlie had meant to get the furnace serviced over the summer because it was old but failed to do so because he was so busy. In addition, he never installed carbon monoxide detectors in the house. The tenant's child was poisoned to death by the carbon monoxide. He got an attorney to sue Charlie. The first thing the attorney did was to find out about Charlie's financial situation. After seeing all the real estate Charlie owned, he sued Charlie for 10 million dollars for negligence in causing the death of his tenant's child. He won. Charlie lost everything he owned even though he had a large umbrella insurance policy.
Charlie Could Have Protected Himself
Insurance is important but it is only part of the solution. Here is what we did to protect Charlie. We designed a custom entity structure asset protection plan for his rental properties. Using a combination of LLC's and trusts, we separated the liability exposure on each of Charlie's rental properties and provided him with privacy so that no attorney could easily find out the extent of his real estate holdings.
What Would Happen Now
Let's assume the same tragic scenario as above, except that Charlie has his asset protection plan in place. The tenant gets an attorney. The attorney attempts to figure out whether it is worth his time to sue Charlie but he can't find any other properties in Charlie's name. He sues the LLC that owns the rental property, wins and collects the insurance proceeds and the equity in the rental property that caused the problem. All Charlie's other assets are safe because they are owned by separate entities. Charlie retains the bulk of his wealth.
The Lesson
Make sure that you properly structure your real estate investments to maintain both separation between properties and maintain your privacy so that nobody can figure out what properties you own without a timely effort. In this manner, you can put up the necessary blocks to prevent a tragedy from liquidating your wealth.
Author Resource:-
Ted Lanzaro, CPA owns and operates Lanzaro CPA, LLC, a boutique tax strategy, accounting and IRS debt resolution firm with offices in Shelton, CT. He can be reached by phone at 203-922-1742 or via email at Ted@lanzarocpa.com. You can visit his website at www.lanzarocpa.com.
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