How an LLC Can Protect Your Home
You know that LLCs give us asset protection. We get it through the laws of each state, which say creditors may not generally attach or seize your assets where those assets are held in an LLC (as long as the LLC has nothing to do with the debt or lawsuit at hand). So in a situation where you’re being sued personally for something, or you’ve got a business that is in trouble, it’s an effective way to keep your home and other personal assets out of the way of those claims.
A Single Member LLC is an LLC with one member, which has elected default tax status. In this instance that tax status is called “disregarded,” which means sole proprietorship. If you were running a business or renting out a property, that means any income/expenses would be reported on a Schedule C or E on your personal return. But because there is no business or rental going on here, there isn’t anything to report.
This is a set-it-and-forget-it strategy. Set up the LLC, transfer the property, and forget it (except don’t forget to keep your LLC up to date with the state registry!). This strategy works for singles and married couples, as long as they file a joint tax return. The IRS considers a married couple to be a single individual where they file a joint tax return.
Even though the home is in an entity, its disregarded tax status means that you still keep all of the tax deductions associated with home ownership. Plus, because the LLC isn’t doing business and isn’t required to file a tax return, you don’t necessarily have to file the LLC in the state where you live. This means residents of high-fee states (California and Maryland, for example, charge LLCs $800 + $500/year respectively) can shop for a cheaper jurisdiction, like Nevada or Wyoming, and form the LLC there.
A couple of cautions before you proceed. First, you may have some transfer tax when you retitle the property into the LLC. Some states will charge you, even though you’re still the owner. So if it costs a bomb to make the move, maybe it’s not for you.
Second, this type of LLC isn’t protected in the case of a personal bankruptcy (unlike your IRA or 401(k). Nor will it stop the IRS or the bank holding the mortgage. But you’ve got a great shot at fending off 3rd party creditors who think you’re worth taking a run at because it looks like you’ve got some money and can afford to defend or pay off a frivolous claim.
Third, remember to keep the LLC up to date. If you form the LLC outside your state, you will have a resident agent fee, and perhaps a small annual report fee. You can keep those costs quite minimal though, with careful selections in state and resident agent service. Overall, I think it could be some great peace of mind for a very reasonable price.
At LegalShelfCompany.com, we know LLCs. The reason we offer shelf company LLCs, rather than corporations to our clients is simple: we think it’s a superior business structure.
If you’re interested in learning more about a shelf company LLC, or possibly a shelf company Series LLC, drop us a line! We’d be happy to discuss your options.