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Should rental property be transferred to an LLC?

February 7, 2020
By ERIC FEICHTHALER - Real Estate Law , Cape Coral Daily Breeze

Dear Mr. Feichthaler,

About 5 years ago my wife and I purchased a home in Cape Coral, with the intention of moving into it after retirement. Fast forward to today and plans have changed. We purchased another Cape home, and the first home has been a rental since we closed on it. The rental is titled in both my wife's and my name.

When discussing this with others, it has been recommended that we transfer the rental property into an LLC, to cover us in the event of an accident or injury on the property that may result in a lawsuit. We carry a $5 million umbrella policy with our insurer and have felt comfortable with this to-date. Do you agree that the policy is adequate, or should the rental be in an LLC?

-Joe S.

Dear Joe:

Thank you for your question, which is a frequent one I receive from clients who, for various reasons, ultimately rent property that they intended to live in. Asset protection is very important to consider when renting properties, and how you go about protecting your personal assets will be dictated by your level of risk aversion. The first step is to have a hazard and flood policy for the rental property up to the full insurable value. You have already taken the next step I recommend, which is to have an umbrella policy that covers excess liability you may incur. This coverage will not only cover your rental properties, but will also cover potential liability for your vehicles and a host of other potential threats, even defamation. Check with your insurance provider to ensure the umbrella covers everything you could potentially have liability for, but most notably for the rentals.

Once you confirm the above, the question will be whether this is sufficient to give you peace of mind. For most of my clients, the answer is yes. However, to further insulate your personal assets, the rental property can be placed in a limited liability company, or LLC. If formed and managed properly, any liability that occurs through the rental of the property would be limited to the value of the property if held in an LLC. You would have the costs of forming the LLC, as well as the annual reporting fee to the state of Florida. You also would have tax reporting compliance requirements as well. The question to be asked -- what are the chances of a liability in excess of $5 million occurring on your rental property? Your specific situation may lead this answer one way or the other, so I recommend you do consult legal counsel prior to proceeding.

Eric P. Feichthaler has lived in Cape Coral for over 30 years and graduated from Mariner High School in Cape Coral. After completing law school at Georgetown University in Washington, D.C., he returned to Southwest Florida to practice law and raise a family. He served as mayor of Cape Coral from 2005-2008, and continues his service to the community through the Cape Coral Caring Center, Cape Coral Historical Museum, and Cape Coral Kiwanis. He has been married to his wife, Mary, for over 18 years, and they have four children together. He earned his board certification in Real Estate Law from the Florida Bar. He is AV Preeminent rated by Martindale-Hubbell for professional ethics and legal ability, and is a Supreme Court Certified Circuit Civil Mediator.

Mr. Feichthaler can be reached at eric@capecoralattorney.com, or (239) 542-4733.

This article is general in nature and not intended as legal advice to anyone. Individuals should seek legal counsel before acting on any matter of legal rights and obligations.

 
 
 

 

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