How To Protect Real Estate Assets According to Tax Experts (2024)

Summary: In this article update, you’ll learn all about real estate asset protection, how to protect real estate assets and avoid lawsuits. Learn time-tested strategies from an active real estate investor and attorney, with 20 years of experience and a portfolio of 200 properties.

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• 4 Real Estate LLC Recommendations for Investors
• How to Use a Trust as an Asset Protection Strategy
• Need Help Protecting Your Assets?

What would happen if a creditor filed a claim against you or your business? Or a disgruntled tenant decides to file a lawsuit against you. Would your assets be covered?

If your business isn’t structured properly, not only can those assets be used to settle the claim, but your personal assets can also be on the line. With proper asset protections in place, you can legally avoid some of the most significant and expensive risks that real estate investors face, like creditor or tenant claims.

You need a customized plan of action that is unique to the types of assets you own, their worth, how you plan to use those assets in the short and long term, and the types of risks they may face.

As you can imagine, planning and executing an asset protection strategy can be a bit complicated… That’s why working with an asset protection expert is usually the best way to go.

I recently spoke with active real estate investor, attorney, and asset protection pro, Clint Coons, to get his expertise and recommendations. He shares, “Every investor is unique. An asset protection strategy isn’t “one size fits” all.”

According to Coons, to build a successful real estate investing strategy that will help you do more with your investments, the three legs of planning must be covered:

1. Asset protection
2. Tax Planning
3. Business Planning

A lot of investors focus on asset protection and tax planning but overlook business planning. Coons explains that even real estate investors with just a few properties in their portfolio need to approach these investments like a business. LLCs are a really good way to set up your investments as a business. This will not only protect your assets, but can minimize your tax burden. More on that later…

Asset protection is a strategy developed to help protect your wealth over the long term. It’s a legal way of protecting your assets from third-party claims such as creditors or other individuals. It’s one of the most important steps you can take to ensure your assets are protected while building your portfolio.

It’s not a tool just used by those that are very wealthy or own lots of properties. It is applicable to most people, especially those that own investments, a business, or a portfolio. The goal is to legally protect your assets. Because any person can be sued for any reason, this strategy helps stop creditors from accessing your assets for payment of settlements, credit card debt, or lawsuits.

There are different methods to asset protection. It could be moving funds into a trust, (such as an irrevocable trust), or maxing out your IRA contributions. Real estate investors can protect their properties by creating land trusts along with Limited Liability Companies or LLCs. These methods must be legally binding, which is why it’s important to work alongside an experienced professional to come up with and implement these strategies.

Asset protection does not violate any law but rather uses laws to help protect your assets.

Asset preservation is another valuable tool used to help protect your real estate investments. This term can be used in a variety of ways. For example, it is sometimes used to discuss how assets are managed while you are alive, compared to a “will”, which outlines what happens to your assets after you die. Another common use for this term has to do with creating wealth protection strategies, such as asset protection methods.

Asset preservation is often linked to estate planning. How you hold and manage these assets in the time that you own them can impact those assets’ values. For instance, depending on whether or not you use a trust, your assets may face tax implications. But, it is possible to structure your assets in a way that minimizes taxes and maximizes protection.

The end goal of asset preservation and asset protection is the same. It’s to minimize what can be done to these assets to reduce their value. Creditor claims and taxation can create vulnerabilities for property owners. Yet, there are very safe and legal ways to structure and hold these assets that help reduce these risks. Your assets will then maintain their value long term.

It’s hard to predict a lawsuit. In fact, most people who encounter a lawsuit say, “but, I never saw it coming!” The best strategy to protect yourself from a lawsuit, is to come up with a plan before getting sued. You’d be surprised by how many investors put off taking the proper steps to protect their assets. Or put multiple investment properties into one LLC instead of many, just to save money on set up costs.

Coons explains why this is bad advice, “You don’t want to put multiple properties into the same LLC to save money on expenses. Think about asset protection as another investment on your property. You’re making an investment in an LLC to protect the investment.”

While you can’t plan for every single contingency, you can put up several roadblocks and safety measures around your real estate assets to ensure that you have the maximum level of protection, should an unexpected threat materialize.

The reason for safeguarding your real estate assets is simple: a failure to do so is like leaving your door open during the holidays and then wondering why a burglar stole everything. If you don’t protect your assets before a lawsuit, then you are at a heightened risk of losing everything.

There are many misconceptions that can actually put your assets at a greater risk. To avoid these common mistakes, we’ll discuss two of the best asset protection strategies for real estate investors: land trusts and LLCs.

A land trust is designed to hold your real estate assets. It provides several advantages, but only if you follow the necessary steps. In fact, one of the most common misconceptions associated with land trusts is that you can “simply transfer your real estate assets into a land trust, where you are the listed beneficiary, and protect yourself from a potential lawsuit.” Land trusts by themselves do not protect real estate assets.

Land trusts are revocable or grantor trusts, which means that if you leave the property in a land trust and a lawsuit is presented, then you could be held liable. They do, however, provide an interim step in protecting your real estate assets, which is why investors use land trusts.

Think of land trusts as a secure box with the sole purpose of simply holding real estate. This box includes a set of instructions for the grantor, trustee, and beneficiary. The instructions will include detailed information about who can lease, sell, or encumber the property. Additionally, the instructions will specify how any money earned should be distributed. Land trusts are appealing to investors because of the dual simplicity and functionality they can provide.

Land trusts can provide several advantages, which is why they are a useful step in creating and implementing a plan to protect your real estate assets.

1. The transfer of property is much easier than a LLC. — A land trust is equipped with detailed instructions for the grantor, trustee, and beneficiary. A land trust makes it much easier to transfer property, should something happen to the beneficiary. Rather than dealing with a complicated will, the new beneficiary can be easily assigned under the guidelines of a land trust. Once the new beneficiary is in place, the instructions of the land trust will remain; once again providing simplicity and functionality.
2. Offers privacy of ownership and transferring interests. — Many individuals want to keep the value of their real estate assets off of public record. The beauty of a land trust is that it offers privacy ownership, which means that the value of its real estate assets won’t be on the public record. If a lawsuit comes up, it will be much harder for someone to go after your real estate assets, since they won’t be able to know their value or that you even have them.

Avoids transfer taxes. — Unlike transferring a property into an LLC, transferring a property into a land trust can typically be accomplished tax free. In these instances, the federal government often treats the property as if it was owned outright by the beneficiary. As such, many states don’t require the individual to pay transfer taxes. Not only can you avoid transfer taxes, but land trusts ensure that you can still qualify for homestead tax exemptions (if applicable).

While land trusts offer all the advantages described above, there are several disadvantages of using only a land trust to protect your assets.

1. Little protection to offset litigation or taxes. — The biggest disadvantage of land trusts is that they do not provide asset protection. This is why transferring your assets to a land trust is just an interim step to protecting your assets. As a revocable grantor trust, there are instances when a lawsuit can be filed against a lone beneficiary. Should this occur, the courts might force the beneficiary to alter the terms of the trust to benefit the claims of a creditor. If a lawsuit is presented, it will be very easy for a legal professional to find out how the land trust was created. This information will eliminate anonymity and result in the aforementioned legal action against the beneficiary. Additionally, once anonymity is lost so is the tax advantage that a land trust can provide.

Not recognized by statute in many states. — Land trusts are not legally recognized in many states, which can put your assets at risk during the time it’s held in the trust. Additionally, state statutes change all the time. If you or the lawyer who is setting up your land trust are not experienced or familiar with up-to-date state statutes, then your assets could very easily be at risk. Even if you do live in a state that recognizes land trusts, there are still several steps to take in order to take advantage of tax exemptions for all properties held within the trust. To further complicate matters, government personnel in states without the required land trust legislation tend to lack the training or knowledge needed to handle any issues that arise with land trust properties. This lack of knowledge can negatively impact you in the long run.

Knowing how to protect real estate assets requires more than just one step or one layer of protection. Land trusts offer the advantages of more easily transferring property, privacy for all parties involved, and no transfer taxes, but it should only be used as an interim step.

To protect your real estate assets from a potential lawsuit, after transferring your assets into a land trust, the next step should be to transfer the trust into Limited Liability Companies or LLCs.

LLCs are a type of legal business formation. They’ve become a very popular way to protect real estate holdings. When property is placed under an LLC, it can reduce personal exposure to risks surrounding that property. There are also several tax advantages.

When real estate is placed in an LLC, the property is treated as a business. It is no longer directly linked to the owner’s assets but is a standalone business. As a result, any lawsuits filed against the property, such as someone being hurt on the property, will impact only the business, not the owner’s personal property and assets. On the other hand, if a property owner does not create such a business entity, his or her personal real estate assets can become accessible in a settlement from such a lawsuit.

This transfer of ownership is important because it avoids informing the banks that you are in fact relinquishing ownership of the property into a business entity.

Additionally, LLCs become separate, taxable entities. Depending on the type of real estate, its use, and its value, this can help reduce some of the taxes the owner pays on that property. Tax elections and specific entities have the ability to decrease risk and minimize taxes.

But it doesn’t stop there–these strategies can make your personal tax returns look better to lenders…

Check out four recommendations from asset protection expert Coons to ensure that your valuable real estate assets are fully protected should a lawsuit present itself:

1. Multiple properties in one LLC is not recommended. — A common misconception for smaller investors is that you can put two or three properties into a single LLC because you don’t have a lot of risk. But placing more than one property into an LLC isn’t the best asset protection strategy. That’s because if one of your properties in the LLC faces a lawsuit, then by association the other properties within the LLC might also be at risk. The best approach is to have multiple LLCs hold your investment properties. In fact, you can have an unlimited number of LLCs. Through the proper setup, LLCs don’t require investors to file taxes on every property. In order to know how many LLCs you should have, consider your risk tolerance. If one of your investment properties carries more liability than others, it’s probably best to have that property in its own LLC.
2. File the right tax return to protect your income. — If your properties are held in LLCs, you don’t have to list every property, income from that property and the expenses associated on page one of a 1040e. Instead, page two of a 1040e is where you’ll find the K-1. Information associated with your real estate investments will be listed here. So if you held multiple investment properties in multiple LLCs, the income made from the properties within your LLCs would be filed on a K-1. If you list your income on a K-1, it cannot be reduced. This can help investors look good to lenders because when they consider your debt-to-income ratio, your entire income will be considered.
3. More insurance versus multiple LLCs? — “But I have an insurance policy that will cover me in case anything happens.” Famous last words…A common question in asset protection is why you can’t simply take out additional liability insurance to protect yourself in the event of a lawsuit. The main issue is whether or not the insurance company will actually cover you. Insurance policies have a lot of exclusions. Unless you pull out your magnifying glass and read the fine print, you probably won’t know that your policy doesn’t cover an event until it actually happens. And by then it’s too late. More insurance can help reduce risk to an extent, but it’s not a comprehensive solution. You’ll want to separate real estate assets from personal assets. Business entities like LLCs can shield assets and help prevent losses in nearly every situation, including creditors, lawsuits, and tax implications.
4. Should you use Nevada or Wyoming LLCs? — When learning about real estate asset protection and LLCs, many people ask specifically about Nevada and Wyoming. Both of these states offer excellent asset protection. Unfortunately, these two states have also been misused. When you set up an LLC in Nevada or Wyoming, your name is not attached to the LLC, which provides instant privacy and the property can’t be taken from you. However, if you are not running your business in either of these states, then you will lose your privacy once it’s registered in the state where you are running your business. You will also be charged fees each year for creating these entities in both states. For example, let’s say that you are doing business in California, but have an LLC in Nevada. You would be charged fees in both states, and the LLC will fall under CA statutes. This means you will lose the benefit of anonymity. It’s best to register the LLC in the state where you are actually doing business in order to avoid paying double the fees. Remember, the land trust portion of the LLC does offer its own privacy benefits.
5. Reduce your likelihood of getting audited by filing a Partnership 1065 tax return. — Using a Partnership 1065, all properties will be listed under the LLCs. According to Coons, many tax experts say that you are less likely to get audited because there are only about 10% of auditors qualified to analyze a 1065. Interesting!

Make sure LLC state statutes are up-to-date. — LLCs are a relatively new real estate asset protection strategy in the United States. As such, the laws governing this entity are subject to change. In fact, each state has its own set of statutes regarding LLCs. Land trusts and LLCs together offer the best asset protection strategy. Smart investors should stay up-to-date on their state-specific LLC statutes. Not doing so will leave you and your assets more vulnerable and expose yourself to unnecessary risk, should a renter or creditor try to sue you.

Living trusts are a great estate planning tool to make sure all your assets, not just real estate, are protected while you’re alive and how they should be handled after you’re gone.

Transferring your assets into a revocable or irrevocable trust can reduce the risk of incurring additional taxes. The trust then becomes the owner of the assets. This can preserve the value of your assets long term.

Use the right real estate asset protection strategy for you and legally protect yourself against tax claims, liability, lawsuits, and creditor and tenant claims. There’s a lot on the line here. Your personal wealth. Don’t risk your money and assets when there are asset protection strategies available for all types of investors.

No matter which real estate asset protection strategy you decide to pursue, we always recommend working with an experienced and knowledgeable asset protection professional.