I often have clients ask me for advice regarding their real estate investments, for instance if they’re converting their primary residence into a rental property, or acquiring residential or commercial property to either flip or to lease.  One of the first considerations I typically suggest is to form a limited liability company (LLC), or some other corporate entity, to manage the investment.

An LLC creates a legal separation between your personal assets and the property (and the income from the property).  This means that any liability relating to the property, like a slip-and-fall accident, is limited to the assets of the LLC, which would generally only include the net value of the property and perhaps any rental income in the LLC’s bank account.

This raises another important point:  If you own multiple properties, it would generally be advisable to have a separate LLC for each property to further isolate liability between each property.  In other words, if an accident occurs on one property, it would have no impact on any other property you may own through a separate LLC.

This next point is important.  After you form the LLC, it is essential that ownership of the property be transferred to the LLC.  Check your state’s laws on real property conveyances, but typically, this must be done by executing and recording a deed.

Some states, like the State of Washington, require payment of excise tax or a qualifying exemption when the deed is recorded.  A qualifying exemption in Washington is that the transaction is a mere change in identity, at least to the extent your percentage ownership of the property matches your ownership percentage in the LLC.  In other words, if you own 100% of the property and 100% of the LLC, it is 100% a mere change in identity.

One final point:  Another advantage to managing real estate through an LLC makes adding additional owners/investors very simple because transfers of ownership takes place within the LLC as transfers of the company’s ownership interest as opposed to the necessity of conveyances by deed.

Obviously, there are complexities in creating the documents needed to create the LLC and effectuate the transactions involved. So, as always, it is advisable to consult with an attorney in your state.