Using An LLC For The Ownership Of Rental Properties

I own a couple of homes that I rent out to long-term tenants. I’d like to form an LLC to protect myself from lawsuits by the tenants. My question is regarding ownership of the homes. Should ownership be transferred to the LLC rather than myself, as it is now?

On one hand it seems that doing that would put the homes as assets at risk because they would no longer be behind the corporate veil. But on the other hand if I maintain them in my name, would that present a co-mingling problem that might be used to pierce the corporate veil?

I would try to get around the latter by taking the rent in and putting it in an LLC account, and then using those funds to pay the mortgage, property tax and insurance payments.

How should I proceed?

Answer

If you own the rental property now, in your own name, you are entirely exposed to personal liability for anything arising out of the ownership of the property. This means tenant lawsuits, environmental cleanup, code violations, etc.

Both the rental property itself is exposed to judgments, and you are personally liable (e.g. they could garnish your wages from a job you have outside of owning the rental homes).

If you transfer the ownership to an LLC, then you have a layer of insulation between you and liabilities from the property.

The homes themselves, of course, would be exposed to judgments.

In order to make that layer solid, you need to treat the rental property as if it is actually owned by the LLC, meaning that the LLC:

*Collects the rent;
*Pays the utilities, taxes, etc.

There is no veil-piercing issue if the rental homes are owned by the LLC, the rental income and expenses are received and paid by the LLC, and the LLC’s assets are kept separate from your own (except for distributions of LLC’s profits to yourself, obviously).

Followup Question

How do the potential costs weigh against the lack of protection, for using a single llc to cover multiple properties?

Answer

Costs of multiple LLCs are:

1. Annual filing fees (depends on your state–California has a notoriously high annual filing fee for each LLC).

2. Preparation of tax returns for each LLC.

3. Cost of preparing annual reports (this requirement varies by state–some states do not require annual reports).

4. Cost of accounting for each LLC.

Benefit of multiple LLCs is that risk from one property is isolated from other properties. This benefit is harder to quantify until you have some liability arising from your property, such as environmental contamination.

In my experience, most serious investors form a separate LLC for each property. In many cases, lenders will require that a separate entity be formed for the property and that no other properties are owned in that entity, so as to protect their collateral from having other claims attached to it.

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