Asset Protection for Real Estate Investors
Protect Your Real Estate. Form an ²ÊºçƵµÀ Now. Protect Your Real Estate. Form a Corporation Now.
Investing in real estate can be a smart choice for a balanced investment strategy. You can make that choice even more intelligent by enlisting Harvard Business Services, Inc. to help protect your real estate assets. We can help you form Delaware ²ÊºçƵµÀs for real estate investment.
Real estate investment generally involves risk, such as property-related injuries, tenant disputes, and accidents on the property. Forming a Delaware ²ÊºçƵµÀ for a real estate business separates personal assets from business liabilities, meaning that if a tentant sues or an accident occurs, typically only the assets owned by the ²ÊºçƵµÀ are at risk. Personal assets such as your savings, home, and vehicles are typically protected from business liabilities, often reducing personal financial exposure.
Harvard Business Services, Inc. has specialized in Delaware business formations for more than 30 years. That longevity and leadership give us the expertise to form your business quickly and efficiently, helping to protect your assets and investments. However, we are not a law firm and cannot give legal advice. Please consult an attorney if you need legal advice on this matter. We can, however, explain why investors typically incorporate their real estate as well as point out different strategies to consider when you incorporate your real estate.
What is the best form of asset protection for real estate investors?
When it comes to asset protection for real estate investors, forming an ²ÊºçƵµÀ is by far the most popular option. Forming separate ²ÊºçƵµÀs for each specific property shields the other assets from potential claims, that way if a lawsuit arises it shields each property from one another.
Why Incorporate Your Real Estate?
Real estate can be a good investment, but one that comes with a host of risks and liabilities. If your properties are titled to a person and not a business entity, you are personally liable for damage or losses that may arise from accidents, injuries, interruptions to business or other events.
If one or several of your properties is involved in a lawsuit, your personal assets—cars, home, bank accounts, other real estate investments and more—are at risk. However, you can protect your assets by placing your properties in business entities to create a barrier between you and your assets. This makes it more difficult for the plaintiff's lawyer to pursue your personal assets in the event of a lawsuit involving your investment property.
In addition to real estate asset protection, another reason to operate under an ²ÊºçƵµÀ or corporation is it adds credibility and professionalism to your business. It reassures potential tenants, lenders, and partners that the investor is serious, organized, and committed to operating legally and professionally. This can help in building trust with contractors, property managers, and other industry stakeholders.
How to Incorporate Your Real Estate
Many lawyers agree the smart way to approach real estate asset protection is to form a Delaware ²ÊºçƵµÀ and purchase your real estate in the company's name. By using this strategy, your real estate is the property of your company—not you, personally.
Typically, real estate investors choose to form an ²ÊºçƵµÀ rather than a corporation due to the tax benefits. Please consult your accountant for more information.
If you own one real estate investment...
If you own one piece of real estate as an investment, often the strategy is to form a Delaware ²ÊºçƵµÀ and purchase your property under that ²ÊºçƵµÀ's name. This protects you on two levels: your personal assets are legally separated from your property in the event of a lawsuit aimed against your property, and your property is separated from your personal assets in the event of a lawsuit against you personally.
If you own multiple real estate investments...
Some real estate investors who own multiple properties place ownership of all of their properties under one ²ÊºçƵµÀ. While this is preferable to a sole proprietorship, it is not the best form of asset protection for real estate investors, as it puts all of your real estate at risk in the event of a legal issue involving one of your properties.
If you own multiple properties, you may wish to consider a slightly different approach. A number of real estate investors have found success by utilizing a multiple-entity strategy, such as the one illustrated below:
This strategy involves forming multiple Delaware ²ÊºçƵµÀs—one for each piece of real estate. (²ÊºçƵµÀs are used because they are pass-through entities with strong liability protection.) Each property is then purchased under one ²ÊºçƵµÀ's name, so that each ²ÊºçƵµÀ owns one property. Consequently, if one property is involved in a lawsuit, the other properties are out of reach and can continue to produce revenue.
Another strategy that can be used is forming a Delaware series ²ÊºçƵµÀ*. A series ²ÊºçƵµÀ is composed of an individual series of membership interests. Each series is treated as a separate entity (the debts, liabilities and expenses of one cannot be enforced against another series of the ²ÊºçƵµÀ, according to Delaware law), and the series ²ÊºçƵµÀ pays one annual $300 Franchise Tax to the state of Delaware. The illustration below demonstrates how a series ²ÊºçƵµÀ can help provide real estate asset protection:
The predominant entity is a series ²ÊºçƵµÀ. The series ²ÊºçƵµÀ offers you tax advantages and separates your real estate investments from your personal assets, but each property is titled in the name of a separate series.
Please be advised that while there are several benefits to forming a Delaware series ²ÊºçƵµÀ, to protect your real estate assets, there are a few potential drawbacks. The first is that the legal separation of the assets and liabilities of each series is tested only in the Delaware courts of law. Banks are also largely unfamiliar with the structure, and can have difficulty understanding that each series can open a bank account. While Delaware series ²ÊºçƵµÀs pay one annual $300 Franchise Tax to the state of Delaware, the U.S. federal tax treatment for individual series is uncertain. However, the IRS and Treasury Department have proposed regulations that could clarify the situation. Lastly, many attorneys and tax professionals are not familiar with this structure.
Should I start an ²ÊºçƵµÀ for real estate investing?
The ²ÊºçƵµÀ is considered the most popular entity choice for holding assets. This will separate your personal assets from the assets of your real estate business. The ²ÊºçƵµÀ provides many benefits to the members (owners), and may often offer tax advantages, and enhance credibility and professionalism.
These are only two of the strategies you can use to protect your real estate investments and personal assets. It would be wise to first consult with your lawyer and accountant and then rely on Harvard Business Services, Inc. to handle the details of filing and maintaining your company.
Asset protection for real estate investors is crucial due to the financial and legal risks associated with the business. Are you ready to form a company and protect your assets? Harvard Business Services, Inc. makes the process easy for you. Simply click on the button below and fill out our order form.
Protect Your Real Estate. Form a company now!
[Please note: As of August 2019, Delaware has amended its Series ²ÊºçƵµÀ law. All information in this article pertains to what is now known as a Protected Series ²ÊºçƵµÀ, as opposed to the newly introduced Registered Series ²ÊºçƵµÀ.]
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