Renting property to tenants can be lucrative especially in booming housing markets such as Maricopa County. Of course, being a landlord comes with responsibilities such as maintaining the property and responding to repair concerns. However, property owners can also be vulnerable to their tenants taking legal action against them. In some situations, transferring real estate into an LLC (“Limited Liability Company”) may offer a solution and reduce possible damages.
As the name implies, an LLC is a legal entity which can be formed in a manner which minimizes an owner’s personal liability. This corporate structure allows property owners to reap tax benefits while limiting the amount another party can recover from them. For instance, if you were to have your property owned and managed by an LLC and were then sued by a tenant for an on-premise injury, the tenant would not be able to recover payment from your personal assets. This would remain true even if the injured party were to successfully sue and get a judgment against the LLC.
In most cases, property owners have insurance which includes coverage for liability. However, if the tenant or other party obtains a judgment, any amount beyond that coverage will be owed. Under an LLC, your personal assets cannot usually be reached to satisfy a judgment amount.
Taxes and LLCs
Another attractive feature of an LLC is “pass through” taxation. Pass through taxation means the LLC will not owe taxes for property income. Any income will instead pass through the LLC to its members. An experienced real estate attorney and tax professional can help you evaluate the tax implications of the different types of LLCs so that you can maximize this benefit as efficiently as possible.
Property with a Mortgage
Transferring real estate into an LLC can be more complicated when you have an existing mortgage. For instance, depending on your lender and mortgage terms, you may run into a “due on sale” clause which requires that you pay the full balance of that mortgage when moving property in this manner. In this situation, it would be best to obtain the advice of an Arizona real estate attorney who can help you examine the implications of forming an LLC when you still carry a mortgage balance.
Forming an LLC
If you do plan on transferring your real estate into an LLC, it is vital that you do so with the advice and assistance of an experienced real estate attorney. Under Arizona law, if the LLC is not formed or operated correctly, you could end up being personally liable. This can happen when a suing party can show that the LLC’s and owner’s interest are so aligned that the LLC is considered an alter ego of the owner. If the injured party is successful, Arizona law allows the court to act as if the LLC was not formed and permit the injured party to recover directly from the property owner.
While LLC’s offer numerous benefits and can limit a property owner’s personal liability, they must be set up and managed properly to function and provide protection. An experienced Arizona real estate attorney, can help you evaluate your circumstances and make certain your LLC is created and operated in accordance with Arizona law.
Attorney Laura B. Bramnick is an experienced Arizona real estate attorney who can help you protect your interest and get the maximum benefit from your LLC. If you are seeking an exceptional, client-driven real estate lawyer in Scottsdale, Phoenix, Sedona and throughout the state of Arizona, contact Laura B. Bramnick to schedule your consultation.