Protecting Personal Assets From Suit On Rental Property
Ask the Real Estate Lawyer: Real Estate Law Q&A
REM #LAW 634
By Ilyce R. Glink and Samuel J. Tamkin
Summary: A reader would like to transfer their
rental property to an LLC to avoid any personal liability. Sam and Ilyce discuss
how to protect yourself from suit and explain why the mortgage holder may not
approve the LLC.
Q: I have a rental property that I’d like to transfer into an limited
liability company (LLC).
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However, the mortgage company will not approve the transfer without triggering
the “due on sale” clause.
What else can I do as an “asset protection” measure in this case?
A: Many people buy investment property in their own names and later decide
that they would like to insulate themselves from potential problems. An investment
property owner might like to prevent any litigation from spilling over from
one investment property to another or even owner’s personal assets. Separating
these assets is important.
One way to achieve some distance and protection from these potential problems
is to have the investment properties owned by a corporation or company. This
corporation or company would be responsible for the ownership and management
of the real estate. If someone were to sue the owner of the real estate, they
would be suing the corporation or company.
All states have statutes relating to corporations and most now have statutes
relating to limited liability companies (LLC). Both a corporation and an LLC
give an owner of the corporation or company protection against third-party lawsuits.
A good example of these suits would be if someone were to sue the owner for
injuries sustained in an accident on the real estate or a disgruntled tenant
suing a landlord.
Your choice of using a corporation or LLC will be dictated by accounting and
tax issues. Some accountants prefer corporations and others like LLCs, but either
of these choices gives you protection against creditors.
Keep in mind that protection against creditors may not mean that you will be
protected against all creditors. When you buy property that is held in a corporation
or LLC, your lender will probably require you either co-sign or guaranty the
loan that was given to you. In that case, your personal assets are at risk.
But for general issues relating to the property, a person suing the owner of
the property should and will sue the corporation or LLC. If the person suing
wins, and it’s a big win that can’t be paid by the corporation or
LLC, the corporation or LLC would have to file for bankruptcy. Generally, however,
the litigation should not involve the shareholders of the corporation or the
members of the LLC.
Your lender has decided that they will not consent to your transfer of title
from your name into an LLC without triggering the “due on sale”
clause in your mortgage. A “due on sale” clause in a mortgage basically
states that upon the sale or transfer of interest in the real estate the lender
has the option of calling the loan due. If they called the loan, you would have
to pay back the loan in full.
Assuming you have a loan you don’t want to refinance, the risk of transferring
the title and having the lender call the loan may be too great. In that case,
you should make sure that you have sufficient insurance on the investment property.
Talk to your insurance agent. You may need to take out additional liability
insurance coverage to protect you and your other assets. If you can’t
insulate the property by increasing the coverage, then you will have to insulate
Other assets you own (other than the investment property) could be placed in
trusts and other asset protection devices. Depending on the complexity of your
real estate holdings and other assets you may own, some of these asset protection
devices are costly.
If this is your only investment property, the best advice is to manage it professionally,
keep it maintained, obtain additional liability insurance and make sure that
your current insurance policy has broad coverage and covers the rental use of
Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce
R. Glink’s latest book is 50 Simple Steps You Can Take To Sell Your
Home Faster and For More Money In Any Market. If you have questions for
them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022
or contact them through Ilyce’s website www.thinkglink.com