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By Jason Watson (Google+) Sure. Why not? Everyone else does. The real answer is Perhaps. There are several myths out there regarding the use of an LLC as a shelter from potential lawsuits and litigation. Some of the hype has been created by attorneys who used to charge upwards of $1,000 to form an LLC. And while consultation with an experienced attorney is strongly recommended for your unique situation, as rental property owners ourselves we the feel the excitement of the LLC has overshadowed the reality of our litigious society. In other words, if someone gets hurt and you fail to maintain your rental in a proper and safe condition, you will likely be personally named in the lawsuit and held liable as the owner of the LLC. This question and answer was expanded on in a another FAQ. See Can I be sued if I own an LLC? You may also want to read our tax article on LLCs including the litigation and liability issues at- www.watsoncpagroup.com/LLC.pdf So, what do you do? Securing a decent umbrella policy both at the personal and commercial level is our strong recommendation for liability arising from your acts, errors and omissions. General umbrella policies are $300-$500 per year. The floor of many umbrellas is around $500,000 so you might have to raise the limits of each rental to meet the floor (so there’s no break in coverage). It appears that many credible lawsuits will sue to the limit of coverage to avoid lengthy and expensive trial litigation. Again, please consult your attorney for your unique situation. And no, we don’t sell insurance. Specifically for landlords, keep your rental in proper working order- tight railings, shoveled sidewalks and driveways, cooler hot water temperature settings, newer tempered windows, update smoke detectors, CO2 monitors, etc. Moving on, corporations protect the owners from being personally responsible for the corporation’s debts and obligations. However, in today’s lending climate it will be very difficult to get a mortgage loan on a rental property in the name of the LLC without having to sign a personal guarantee of the mortgage note. Sure, non-recourse loans are available, but they are expensive and require 60% loan to value at best. If you think you’re clever and quit-claim the title / deed to the LLC after you close on the loan be careful. The lender might catch wind of it through routine title checks that they now perform, and the lender might call the loan. Not good. Having said all that, it is not a bad idea to have an LLC own your rental property if you can. You might also consider having your tenants sign Hold Harmless Agreements. Essentially you are adding layers to your liability onion. Additionally, if you are investing with partners an LLC with a solid operating agreement might be the only way to properly handle the ownership. A common situation is where two family members invest together and need ways to affect ownership changes, such as a parent and child. Of course the Watson CPA Group can assist you in creating the LLC. On small side note- real estate professionals might also be creating a mess with the material participation definitions within a partnership LLC. If you are considering to claim the real estate professional designation, we encourage you to read our recent tax article on the subject- www.watsoncpagroup.com/REP.pdf Lastly, there are some potential tax issues regarding LLCs and rentals. Please see What are the tax issues with an LLC owning a rental property?
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