| An affordable and very effective method to shield | | | | attractive option for investors. |
| your assets from attack is to transfer your rental | | | | Additional benefits of the LLC include the ability of |
| property to a Limited Liability Company (LLC). Holding | | | | LLCs to utilize 1031 exchanges and exemption from |
| title to investment property through an LLC limits the | | | | the 3 1/3 withholding on sale of real estate for |
| liabilities of the business to only those assets held within | | | | multi-member LLCs. Furthermore, a separate federal |
| the LLC. In the same way as shareholders of a | | | | tax return is usually not required for single-member |
| corporation are shielded from liability, a properly formed | | | | LLCs, including those owned by a husband-wife or |
| LLC will guard its owners from lawsuit liability, including | | | | living trust, and the property transfer to the LLC is |
| liability from acts of its employees and agents. | | | | almost always exempt from tax reassessment. And |
| There are several significant benefits the California | | | | the LLC will work very well in conjunction with a living |
| LLC can provide to you or your investors. The LLC | | | | trust to simultaneously protect and preserve estate |
| creates a risk barrier which encourages apartment | | | | assets. |
| ownership, yet shields the owner's personal assets | | | | Many apartment owners have executed a living trust |
| from lawsuits and seizure. The double taxation and | | | | in order to provide for the distribution of their assets |
| extensive formalities inherent with traditional | | | | after they die, as well as to avoid huge probate costs, |
| corporations are eliminated. When legal action such as | | | | reduce or eliminate estate taxes when they die, and |
| an eviction is required against a tenant, it is the LLC, | | | | prevent court control of their assets should they |
| rather than the individual owner, that pursues the claim. | | | | become incapacitated. The living trust, however, will not |
| In addition, the landlord's privacy is enhanced because | | | | protect against lawsuits. If an apartment building is held |
| rent checks are made payable to the LLC, lease | | | | directly by a living trust, then all other assets in the trust |
| agreements are between the LLC and the tenant, and | | | | will be exposed to lawsuit liabilities generated by the |
| correspondence comes from the LLC. | | | | building. A much better approach is to place your |
| While high limit liability insurance is important, it is still not | | | | apartment in an LLC, creating a liability barrier in order |
| adequate to protect the property owner(s) from loss | | | | to protect all of the other trust assets. The LLC |
| of assets. Most insurance policies contain exclusions | | | | membership interests may then be safely added to |
| for mold, lead-based paint and other environmental | | | | the trust. |
| hazards. Additionally, they rarely cover judgments | | | | As far as multiple investments are concerned, it is |
| arising out of discrimination claims. Even with expensive | | | | better to have a separate LLC for each rental |
| high-limit insurance coverage, a major incident such as | | | | property so that liability arising from one property |
| a fire or balcony collapse resulting in numerous claims, | | | | cannot attach to any other properties. Even |
| could create liability far exceeding your policy limit. | | | | single-family homes with tenants should be held by |
| Even with the best of intentions regarding your tenants, | | | | their own LLC. If paying $800 annually each for multiple |
| the LLC has become a necessary tool in limiting liability | | | | LLCs is not a viable option, then properties could be |
| not only for legitimate claims, but also for those in | | | | grouped together. Owning a total of six investment |
| which only a brainwashed jury could see merit. The | | | | properties with three in one LLC and three in the other |
| deductible $800 annual State franchise tax on LLCs is | | | | would afford significantly more protection than owning |
| small compared to the huge benefit provided. | | | | all the properties in one's personal name. For those |
| In recent years, the State of Nevada LLC has been | | | | investors wishing to transfer multiple properties with |
| touted as an asset protection alternative to the | | | | annual gross rental receipts totaling more than |
| California LLC, since the annual tax is relatively small | | | | $500,000 into a single entity, the use of a limited |
| compared to California. However, in most cases there | | | | partnership should be considered. Both the limited |
| is little or no financial benefit to forming a Nevada LLC | | | | partnership and the LLC must pay the $800 franchise |
| for your California rental property, because the | | | | tax, but the LLC must pay an additional gross receipts |
| ownership of the California property necessarily | | | | tax if the gross annual receipts exceed $250,000. |
| means business is transacted in California. As such, the | | | | Because landlords are subject to virtually unlimited |
| Nevada LLC also must be registered with the | | | | lawsuit exposure and financial liability arising out of |
| California Secretary of State and pay the initial | | | | ownership of their rental property, they must take |
| California registration fee and $800 annual franchise | | | | advantage of every lawful means to protect their |
| tax, along with California income tax. (Ca. Rev & | | | | assets. Once a competent attorney prepares and files |
| Tax Code Sec. 17941, Ca. Corp. Code Sec. 17050). For | | | | the array of legal documents required for the initial |
| business ventures other than California real estate, | | | | formation of the LLC, personal assets will no longer be |
| where the principal business is not transacted in | | | | reachable to satisfy any debts or judgments against |
| California, the Nevada LLC/Corporation may be an | | | | the LLC. |