There are two typical approaches: (i) hold it in an LLC; or (ii) hold it individually or in trust, but obtain excess “umbrella” liability insurance.
The LLC will protect its owners from liabilities of the investment property. To preserve that protection you must respect the LLC as a separate entity. It should have its own bank account that is used for the business of the LLC and not for personal transactions of the owners. Where the governing law requires formal approval of an action by its owners or managers, that action should be documented. The LLC should carry appropriate liability and hazard insurance, and leases should be in the name of the LLC. And yes, a separate tax return must be filed if there is more than one owner.
In Florida, if the LLC has more than one owner the assets of the LLC will also generally be protected from claims against an owner. On the other hand, if there is only one owner, the assets of the LLC may be exposed. In a single-owner scenario, umbrella insurance on that owner may still be advisable to help protect the investment.
When there is more than one investment property a decision has to be made about whether to hold each property in a separate LLC, or to aggregate them together in one. Separate LLCs will keep the unexpected liabilities of any one particular property separate from the others. Separate LLCs will however involve more cost and ongoing administrative work (separate accounts, separate tax returns, etc.).
Individual or trust ownership does not have these same protections, so to mitigate the risk in that scenario you may obtain umbrella insurance to provide extra coverage in the event of a claim.
Caveat about mortgages: When an existing investment property has a mortgage it may not be possible to obtain the consent of the lender to transfer that property into an LLC, so umbrella insurance may be the only viable option short of obtaining financing in the name of the new LLC to refinance the existing mortgage.
Caveat about real estate located in other states: Investment property located in another state should be held in an LLC or in trust to avoid the need for probate in that state. Each state retains jurisdiction over real estate within its borders, so an individual that dies owning an investment property (or even a second home) in another state must have their estate administered in the probate court of that other state – a proceeding referred to as an ancillary administration – to transfer ownership. Ownership in either an LLC or a trust avoids this.
If you have specific questions about your situation, please contact us.
