I OWN RENTAL/INVESTMENT PROPERTIES – HOW SHOULD I HOLD TITLE?
It is not uncommon today for people to own properties other than their home. For liability purposes it is best to own these additional properties in a separate entity called a “Limited Liability Company” (LLC). A limited liability company is a legal entity which you or you and others own together that would then own the rental property.
For example, I create an LLC called Crisci Enterprises, LLC (you choose your company’s name so long as the name you have chosen is not already taken) by filing the appropriate paperwork with the Connecticut Secretary of State and following the other required legal procedures. I then either purchase a rental property using the LLC as the owner of the property or I transfer a property I already own to the LLC. The LLC will now be the owner of record. You will have to open a bank account in the name of the LLC, transfer the property insurance and utilities, if any, into the name of the LLC and tax bills will come in the name of the LLC. You have now created a wall of protection between that property and all your other assets so long as you continue to keep your personal assets separate from the LLC’s assets. What this means is that if a tragedy befalls someone on the rental property and they sue the LLC for damages, and the damages are more than the insurance coverage you have, the only asset exposed to this liability is the asset(s) in the LLC. All your personal assets and home are not at risk. Following this same principle, it is usually better to limit the number of assets each LLC holds. If Crisci Enterprises, LLC owns six rental properties, under the example above, depending on the damages of the injured person(s), all six of those properties are exposed. However, if I had six LLC’s and each LLC owned one of my six rental properties, then each asset is protected from the liability of the other and all my personal assets are also protected. The downside to doing this is that your property insurance premiums tend to be higher than if you pooled them with your other assets; you will have an annual minimum tax for each LLC; you will file a separate tax return for each LLC, however, the LLC’s don’t pay any taxes (other than Property Taxes) and all income and expenses “pass through” to your individual tax return. (This is why an LLC is called a transparent entity).
Another protection from personal liability is to purchase additional insurance coverage as well as an umbrella insurance policy to insure against any possible disaster. This begs the question, how much insurance is enough? Even with the LLC’s I would recommend an umbrella insurance policy because it gives you many benefits with a fairly inexpensive premium.
“When results matter, experience counts”