Protecting Real Estate Assets

Are your real estate assets protected? Not, if everything you own is held in your personal name. If tenants (or other creditors) sue you, they can go after assets held in your personal name (your business, home or personal property).

Create separate asset buckets. To protect assets, you must segregate them into separate legal buckets. The number of buckets needed will depend on the type of activities, the risk involved and the value of the assets you own.

Manage properties through LLCs or corporations.  Rentals and investment real estate are often best managed through LLCs, while real estate businesses are generally best operated through corporations when considering both asset protection and tax implications.

Establish good business practices to strengthen the veil of separation. Good practices include (among others) complying with the governing regulations, such as the tenant-landlord laws and not committing alter ego blunders.

Correct title is essential. If a property is owned by a corporation, LLC or trust, then it should be titled as such. If it’s held personally, it should state whether it’s joint, separate, community, tenant-in-common; held in a trust, etc. If improperly titled, the legal intention may not be protected.

Establish legal standing. LLCs or corporations holding real estate must be properly formed or they may lack legal standing. Corporations failing to adopt bylaws and LLCs without operating agreements may subject the assets of their owners to creditors, cause contracts to be invalid and be barred from defending themselves in court or from bringing suit against another.

Maintain legal standing and avoid alter ego. Even LLCs and corporations that were properly formed may lose legal standing when they fail to remain in compliance. Legal standing may be lost when decisions aren’t documented or annual statements aren’t filed. Alter ego is when entities appear to be alternate versions of the owners, thereby comingling the assets of each into one bucket.

Insure the real estate.  Failing to have adequate insurance is one way to have the separate veil of protection pierced.

Don’t do stupid things.  One of the surest ways to lose asset protection is to commit an act of negligence or fraud.  Insurance rarely covers these acts either.