Are you thinking of entering the world of luxurious real estate investing? If so, asset protection is something you do not want to ignore. Otherwise, there is a high likelihood that you will lose your property, personal assets, and even savings when caught up in a lawsuit or probate.

Fortunately, there are several things that you can do to change someone’s ability to file a lawsuit against you. Below are some effective strategies by tax experts that real estate investors can use to safeguard their assets and properties.

What is Real Estate Asset Protection?

Real estate asset protection is a strategy that investors use to protect their properties and other assets from creditors during a lawsuit. If you own an income-generating property like a rental property, chances of getting sued by one of your tenants for breach of the tenancy agreement or if they get injured on the property are high.

If a judge makes a ruling in favor of the tenant, you will be required to pay the tenant’s medical bills, compensate them for emotional distress or lost wages, and pay the legal fees. When you don’t have an appropriate real estate asset protection plan in place, you risk exposing your personal assets to liquidation to settle your financial obligations.

Essentially, an asset protection plan comes in handy to segregate your personal assets from business assets. This helps to set a limit to the assets used to cater to your financial obligations during a lawsuit.

3 Effective Strategies to Protect Real Estate Assets

There are several options that tax experts believe can be beneficial for investors to protect their real estate assets. Some of these common asset protection approaches include:

1. Land Trusts

The other way to protect your real estate asset is to create a Qualified Personal Residence Trust (QPRT). This irrevocable trust cannot be amended without the beneficiary's consent. Typically, your property is held in the name of a trust rather than an individual, making it extremely difficult to trace ownership to you.

Putting your property in a trust is an excellent way to protect your investment. It will be difficult for lawyers to associate you with any of your property when you are caught in a lawsuit. What’s more, one may need to invest a lot of money to discover your property, which can discourage pursuing a case against you.

2. Limited Liability Corporations

An LLC is a business entity that offers protection for incoming generating properties from claims and lawsuits by other parties. This entity assumes the financial and legal responsibility of your asset in the event of legal action.

A significant benefit of setting up an LLC to hold your property is limiting your personal liability. Property placed in an LLC is treated as a standalone business, meaning that your personal real estate assets will not become accessible if a lawsuit is filed against the property. You can take the help of professional  incorporation services to get your LLC registered.

In simple terms, an LLC helps to keep your personal assets separate to prevent exposure to unlimited personal liability. While you can take an insurance policy to cover your assets, it can have a lot of exclusions and may not offer a comprehensive solution for asset protection. On the other hand, an LLC can cover your assets and prevent losses in case of lawsuits, tax implications, and creditors.

This real estate asset protection strategy is beneficial after transferring your assets to a land trust. It adds a layer of protection, and your personal name will not be listed in the property ownership documentation or the trust’s paperwork.

Here are some important things to note about LLCs.

• Opt for More LLCs

If you intend to protect more than one asset, it would be best to hold each asset in a single LLC. It is not recommended to put multiple properties in a single LLC as this may increase the risk of your other properties if one property faces a lawsuit.

To prevent this, put your properties in several LLCs. Nonetheless, it may be more expensive to have more LLCs to hold each asset rather than have a single LLC for all your investments.

• Revisit Your Strategy Regularly

Also, if you have an LLC, it is highly recommendable to regularly update your strategy since the laws governing LLCs are subject to change. Ensure that you review your state’s set of statutes for LLCs and stay updated to reduce exposure to unnecessary risk should a creditor or a renter sue you.

• File a Partnership 1065 Tax Return

Additionally, tax experts highly suggest filing a Partnership 1065 tax return. By doing this, all your properties will be listed under LLCs, making it challenging to get audited. This is because about 10% of auditors are qualified to evaluate a Partnership 1065 tax return.

3. Use a Debt

Debt is another strategy you may want to consider to protect your real estate property. Also referred to as equity stripping, the debt strategy is the most affordable real estate protection strategy that separates and removes any equity that your business may hold and reinvest the money in other techniques.

The main point is to remove any excess equity that may be attractive to creditors. There won’t be much to lose during a potential lawsuit when you don't have much equity available.

What’s more, this strategy lets you create debt as a form of asset protection. You can use the money you remove out of your equity as a loan to purchase another property. The best thing is that this kind of loan is not subject to taxes.

These are some common strategies that tax experts believe can help investors protect their assets. Depending on the size of your investment portfolio, you may utilize one or more of these real estate asset protection strategies. Evaluate the benefits of each strategy and seek professional help to determine the one that best suits the investment portfolio.