If You Buy Investment Real Estate What's The Most You Can Lose? Part 2

If You Buy Investment Real Estate What's The Most You Can Lose? Part 2 by Bill Roberts

You really need to read Part 1 for this to make sense.

Just to recap the basic scenario:

Some might say it is the property. You could get foreclosed and lose the property.

Do you think that is the right answer?

Well the answer is NO that is not all you can lose. You could lose everything you have and everything you will ever have. How's that for a threat?

It all depends on how you hold title to the property (and how you behave).

Well, when something bad happens it is too late to change how you hold title to protect yourself. You should have done it long ago. Let's look at the impact of how you hold title on your "estate" when the devastating lawsuit hits.

Scenario A

You've worked for years building up your estate. You just bought this new property for $3.5 million. You did a 1031 exchange moving your one million dollars equity from a couple smaller investment properties into the new property.

You discussed changing how you hold title with your CPA but he told you that you can't.

You can't change how you hold title because you are doing a 1031 exchange to avoid paying any tax on your gain or recaptured depreciation. Changing how you hold title is a taxable event because it is treated as a sale. But don't worry, you'll be fine. Look at all the tax you are NOT PAYING.

Then you get the judgment against you for something that happened on or because of your property. The judgment is for TEN MILLION DOLLARS. You have one million dollars equity in your property and you have one million dollars liability insurance. This appears to be an eight million dollar short fall. No matter. The judgment beneficiary will summon you in for an examination to discover what assets you may have that he could attach to satisfy his judgment. You have to go and you have to tell him.

Now what?

Unless your other assets exceed eight million dollars you are going to be wiped out. Period.

Scenario B

You just bought the same property as in Scenario A, but you held the relinquished properties in an LLC. Your LLC was able to do the 1031 exchange. Everything's cool.

Or so you think. You have been "managing" the property yourself. The tenants all know you.

When the hot shot lawyer gets this case, he immediately petitions the court to treat this property as if you owned it directly. He alleges that the LLC is nothing more than your "alter ego." You have operated this business as your own. You make all the decisions. You put all the money in an account controlled by you and you alone. You are getting all the tax benefits of ownership. In a nutshell, it is your property. The judge agrees.

Judgment for the plaintiff. Against your LLC and you. Same result as Scenario A.

Scenario C

You think you're smarter than the average bear. You've put all your assets in a FAMILY LIVING TRUST. Now this has got to protect you, right? Not so fast. Let's look at it.

No matter how an asset is titled, it is not going to protect that asset against liability for torts. So when they get a judgment against that property (and its owner) they can still execute that judgment. That means collect against it. But they can also execute against all assets of the owner. And the owner is the FAMILY LIVING TRUST. Uh oh. Isn't that why you had the trust in the first place?

Well, actually, no. The reason you had the trust was for tax purposes primarily and to avoid probate. It is not designed to protect your assets against liability for torts.

What's The Answer?

It almost seems like there is no answer. But we know that can't be true. What do the really wealthy do? What do major corporations do? Aren't they subject to the same laws as you are? Of course they are, but they aren't going to ose everything over something like this. They take precautions.

There are several things you could and should do to protect your assets.

• Get more insurance. Buy an umbrella policy that "kicks in" if you exhaust your basic liability policy. Get it for ten million or more.
• Don't put all your eggs in one basket. Every property should be owned by a separate entity.
• Don't manage your own property. Don't be known by your tenants. If you visit your property, do it quietly.
• Share ownership with others. If the property is in an LLC, let there be other members of the LLC.
• Utilize LAND TRUSTS to mask your ownership. You have a right to privacy, but only if you exercise that right. It is not automatic.

For more on Land Trusts read What Are You Going To Do When They Come For You?  

If you do everything exactly right you can limit your loss to just the property that the judgment is against.

Remember the old saying: an ounce of prevention is worth more than a pound of cure.

To help you plan your estate utilizing real estate investments call Bill Roberts (619) 244-4610.