Should you incorporate your rental property?

If you have rental property, you probably worry about liability of events stemming from the property. More than likely your homeowner’s insurance policy will cover some accidents/damage up to a certain amount if you are personally insuring the property. After that, you are on the hook, and your personal assets may be liable to compensate for anything above the insurance. One option is purchase umbrella insurance to extend the coverage amount; however, once you hit the coverage limit, you are, once again, responsible for any liability.

One of the options is to create a Limited Liability Company (LLC) to protect you personally, meaning that if anything happens in or to the property, your maximum liability is limited to the property. Your personal assets are not affected. There are some stipulations you will have to consider.

• You may have to transfer the title of the property to the LLC. If you carry a mortgage on the property, your loan may be called by the lender. If you are considering creating an LLC, SMC recommends you discuss this with your mortgage lender as they may offer different funding products to make this process smoother.

• Creating the business entity within your state can create a substantial amount of paperwork, accounting, and tax filing inherent to an LLC. Unfortunately, the work required to create the legal entity at the state level is pretty much a standard process.

If your main profession is real estate and you have multiple properties, your cost and time to maintain LLC status on your property is reduced due to economies of scale in streamlining your processes. This information is intended to get you thinking about protecting your financial future. For further questions, please feel free to reach out to us.