What is a Partnership Return?

The LLC or Series LLC has the easiest tax returns for a single member. It's a "pass through entity," which means all of the income from the company can be reported on your personal income tax return.

You don't have to pay thousands of dollars to a CPA to file a business return. Great news!

This is also true for your spouse filing jointly. This can make tax preparation a lot easier.

Some states have specific tax rules regarding multi-member LLCs. For example, if you and a partner have an LLC, you may need to file a partnership return. This is a separate return for the business itself. You need a good CPA who knows about real estate investing to help you make sure you're doing it right.

Also note: In some cases, an LLC can be taxed as a corporation. In some cases, it makes sense to have your LLC taxed as an S Corps.

Keep more of your money with a Royal Tax Review

Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation.    TAKE THE TAX DISCOVERY QUIZ

Everything You Need To Know About IRA & 401k Distributions

Are you ready for the next phase of life? One that leaves the daily grind behind? If you're nearing retirement age, you've been saving for a long time, and now you're getting close to the point where you can start taking distributions (finally).

Let's review everything you need to know about taking a distribution from an IRA or 401(k).

Options For IRA or 401(k) Distributions

When you receive a distribution from a 401(k) or IRA you should weigh the following tax options:

What Happens When You Take Money Out of Your IRA or 401(k)?

You'd think this would be a no brainer, wouldn't you? You saved up for retirement, now it's time to start receiving it. But it's never simple when the IRS is involved. When you take money out of your IRA or 401(k), the following income tax rules apply.

How Are Distributions From a Traditional IRA Taxed?

Distributions from a traditional IRA are taxed as ordinary income, but if you made non-deductible contributions, not all of the distributions will be taxable.

Internal Revenue Code Section 72(t) imposes a tax equal to 10 percent of certain early distributions from IRAs (exclusive of portions considered a return of non-deductible contributions).

The 10% tax, which must be paid in addition to the regular income tax on the distribution, applies to all IRA distributions except the following:

 

Options For Receiving Distributions Before Retiring

The current retirement plan rules discourage taking distributions before retirement. The following are the options you have when receiving a distribution prior to retirement:

As I mentioned above, you can also choose to do forward averaging. But your best bet is to just wait until you reach retirement age.

How Landlords Protect Themselves From Lawsuits

If you are a landlord, you have likely put in a lot of blood, sweat, and tears to get where you are. Still, you have to put in a little bit of extra work to avoid the risk of losing it all in a lawsuit. 

Let's look at how landlords protect themselves from lawsuits and limit their liability exposure.

Asset Protection Is A Little Different for Landlords

While it would be improper to cast the landlord/tenant relationship in an adversarial light, the best way to protect yourself and your assets from lawsuits is to be a good landlord.

Don't get defensive; hear me out. This is easier said than done!

After all, no one sets out wanting to be a terrible landlord who will inevitably get sued by an angry tenant. For this reason, getting competent legal advice on how to effectively meet all your obligations as a landlord will be a huge step forward in making sure there is no grounds for any tenant to sue.

You can start by checking out these asset protection articles. As our backlog of articles will show, we're big fans of corporate structures that protect assets—structures like the LLC. As its name implies, a limited liability company (LLC) limits your liability exposure. Furthermore, if you set up an LLCs for each property you own, you can ensure that each property is isolated from the others in the event of legal action.

Beyond creating an anonymous structure to hide away your assets, you might also establish a shell company through which you manage everything. This keeps your assets from being taken from a lawsuit by making your shell company the entity that interacts in legal issues.

But let's not get ahead of ourselves. Let's look at ...

A Landlord’s Legal Duties

One of the most fundamental contractual agreements is that between a landlord and tenant. As such, there is a wealth of legislation and case law establishing the exact nature of that legal relationship. For landlords, it is vital to effectively discharge all legal duties in order to avoid a lawsuit.

These primary duties are:

Unless you have a particularly belligerent tenant, lawsuits will be the last resort for most. This means that there will be chances to remedy the situation long before you're facing legal escalation.

That said, it is worth noting the most common reasons a tenant will try to sue. In no particular order, they are:

1. Wrongful Eviction

Although landlords win 90% of all lawful evictions, a wrongful eviction is not good for anybody.

If you need to evict a tenant, seek legal advice so make sure it's done lawfully. You must obtain a court order before simply changing the locks, moving the tenant’s belongings out of the property, or cutting off utilities.

Additionally, a tenant has what is called a right to “quiet enjoyment”, this protects a tenant from harassment and privacy violations. If the tenant is compelled to leave the premises due to a breach of quiet enjoyment then this can be deemed a “constructive eviction” and is subject to be treated as a wrongful eviction.

As the penalties can include everything from legal fees to jail time, a savvy landlord looking to protect themselves will be best to only proceed to evict in a lawful manner.

2. Livability Issues

Another potential opening for a lawsuit is if the property has issues that make the property unlivable. A well-maintained property should not have livability issues. After all, you do want to take care of your investment, right?

Generally, a property will be considered to have livability issues if one of the following is present:

As mentioned, regular maintenance means protecting your investment and rarely having to worry about these potential legal issues. Let's hope you never need it, but be sure to check out our article, When Should a Landlord Hire a Lawyer?

3. Misusing Consumer Reports

It is common for landlords to screen potential tenants by looking at their credit reports or by running criminal background checks. While a wise policy, the Federal Fair Credit Reporting Act has strict compliance rules for how you use the information obtained. If in doubt, seek qualified legal advice.

4. Misusing Security Deposits

If not handled properly, issues around the security deposit can be the most volatile for lawsuits. However, there are key things that can be done to protect against lawsuits:

Above all, know the requirements imposed by the law regarding security deposits as the risks are severe if these requirements are not fulfilled.

Additional Ways Landlords Can Limit Liability

At the risk of sounding like a broken record, getting a great lawyer to advise on this issue is essential. Every great player needs a coach, and every great landlord needs a competent lawyer to advise on winning strategies to limit liability exposure.

You should also limit your exposure as a landlord by ensuring that you have these forms completed. Here, attention to detail matters; every detail of the lease needs to be spelled out. 

Being a landlord is an achievement, and it is well worthwhile putting in the effort to ensure that your asset is protected from lawsuits. Along with being a good landlord, having a great lawyer is key to avoiding those pitfalls of legal exposure. 

 

Control Without Ownership: The Smart Way Real Estate Investors Own Property

If you are in a position to invest in real estate, congratulations! Your hard work, saving and diligent money management will pay off. 

Now's not the time to ignore asset protection. This means structuring your business in such a way to ensure the maximum legal protections. Let's make sure your hard-earned money is kept as safe as possible. 

Owning properties makes you a target for lawsuits. However, properly structuring the way you own properties makes lawsuits against your assets not worth anyone's time. Reliable asset protection kills lawsuits before they can begin. It makes legal actions against you so complicated and bound up in red tape that any would-be litigant will quickly run out of money and motivation to come after you in court. Instead of a pot of gold at the end of your rainbow, they'll find nothing but headaches and legal fees.

Whether you are new to investing in real estate or simply looking to restructure your existing investment portfolio,  this article is intended to introduce you to a fundamental concept of asset protection: control without ownership.

control without ownership - three ballsThree Ways To Achieve Control Without Ownership

You might think that being rich means owning lots of assets. The truly wealthy don't on squat. Being rich really means controlling assets instead. So it follows that the underlying principle behind intelligent investing means transferring ownership of your investments to a legal entity, which in turn is controlled by you.

If you are looking to create such a legal entity, here are three options to consider: land trusts, an LLC, or a shell corporation

1. Land Trusts

Anonymous and easy to create, a land trust is one of the most effective legal entities to transfer your property to. Now you may be thinking, “why do I need to be anonymous?” The simple answer is that anonymity is a necessary layer of protection against lawsuits—if people don’t know what you own then they won’t bother suing you!

Setting up an anonymous trust can be extra powerful as an investment strategy if combined with an LLC. Listing your trust as a member in the LLC, you establish two levels of separation from yourself and the assets you control.

2. Limited Liability Companies

The beauty of LLCs is that you are protected from the liabilities of ownership. The LLC itself is protected from any personal liability you face or judgements against you. Thanks to this in-built protection, LLCs should be part of every asset protection strategy. For protecting several properties, you can set up a Series LLC so each asset is separate from you and one another. While it can be complex to set up, with a competent lawyer, you should have no problems transferring your investments to an LLC controlled by you.

3. Shell Corporations

The idea behind a shell company is to have a vehicle for business negotiations and management that is separate from your asset-holding legal entities and yourself personally. An LLC can be a great choice for your shell corporation.

What About Equity Stripping?

While shell corporations, LLCs, and trusts are ways of hiding your ownership, equity stripping is a legal way to make your investments seem less valuable than they are. Essentially, equity stripping is when you saddle your asset with harmless debts, liens, and any other tool that lowers the perceived value of the equity in the asset. It is a common method of protecting assets and works as a way of changing perceptions to avoid being a target of lawsuits.

Things To Remember About Control Without Ownership

There's no need to run off and try to implement all of these strategies at once—that would be a complicated asset protection approach that would be overkill for most investors. First of all, make sure to get competent and trustworthy legal advice before considering any of these options. And secondly, you need to consider all potential downsides. These downsides include the costs and tax consequences of these "control without ownership" strategies.

If you engage in equity stripping, for example, taxes can be minimized with the help of a knowledgeable CPA. But you should tread lightly; taking on debt, is just that—debt, which generally is a negative thing. Extreme care must be taken so that it your approach is completely above board—otherwise you risk exposing your assets (or worse).

Don’t Take Half-Measures

You don't have a lot of time to spend on this stuff, right? Or maybe you are trying to save money. Either way, it may be tempting to half-ass your approach. This might creating one LLC and transferring all your assets to it. While this will separate you from your assets, it simply makes your LLC the new target for lawsuits. Also, if you forget to include an element of anonymity and pile your assets into a single company, you risk having that company being considered your "alter ego" and all those assets becoming vulnerable.

A job worth doing is worth doing well. You must consider how to best make your business unattractive  for anyone to sue. This can only be done by fully outlining an asset protection structure which may involve multiple separate legal entities.

Remember: different states need different structures due to their state laws. Don't rely on online legal forms and advice that isn't specific to your needs (and that includes what you read here). You may end up with unnecessary fees and taxes without really getting the asset protection benefits you hope for. 

It is not too much of an exaggeration to say that taking shortcuts and the easy route puts you in a position as if you hadn’t bothered at all!

The Takeaway

It is a no-brainer that if you have assets, you need to think about asset protection. As such, it is worth investing the time and effort into making sure your asset protection structure is suitable for your state, that it protects your anonymity, and that it makes suing for your assets untenable.

The primary principle is that you need to transfer ownership of your assets to a legal entity that you control. Should something go wrong, there will be no clear target for a lawsuit.

While you may consider trying to do this yourself, many law firms will have experience setting up asset protection and know exactly the right structure for your circumstances. It is recommended to take advantage of this so that you can control property the smart way, the way the truly wealthy do. Own nothing.

 

Community Property: What Investors Need To Know

You can't be a great real estate investor if you don't have an understanding of marital property laws and how they affect your investments. Most U.S. states use common law, also known as or equitable distribution, as their matrimonial regime, but in Texas and eight other states, community property is the rule.

What is Community Property?

The principle of community property is that each spouse owns half the couple’s assets.  It assumes that every contribution each spouse makes to the "marriage community" should be shared.

This means property, income, and other assets acquired by either spouse during the marriage belongs equally to each of them. It also means that in the event of death or divorce, each spouse gets an equal share of the property.

And before you ask me, yes, it also means that both spouses are accountable for the other’s debts.

Some exceptions apply to allow sole ownership of a property or certain assets:

Property one spouse acquired before the marriage remains that person’s sole property, unless it transmutes, or changes, to community property by:

It is important to note that in Texas and Idaho, income earned from separate properties is considered community property. In the other community property states, such income is considered separate. That bring me to our next section ...

What Are The Community Property States?

Community property is the law in the following states:

Out of the nine states that use community property instead of common law, Texas is the only community property state that recognizes common-law marriages (not to be confused with common law property). In the other states, only legal marriages pertain to community property. 

Property rights in some states, including Texas, may come into play in partnerships that resemble traditional marriages, e.g. by length of cohabitation or the raising of children together. Where separate ownership cannot be ascertained, the court m

ay rule on an equitable split, which is partly depending on how much each spouse contributed financial assets to the marriage (e.g. 40/60 or 30/70 instead of 50/50.) In California, the split must be 50/50.

Which State Has Jurisdiction Over Your Investments?

community property family law

For most people, it's an easy-to-answer question. Where do you live? Is it in a community property state or not?

But for may of us who invest in assets all over the country or all over the world, we have to look at other factors.

Yes, domicile, a person’s legal permanent address, is used to define where a couple lives, and therefore which state’s jurisdiction their property law comes under. This becomes important for couples that end up in the divorce courts if they have homes in more than one state, or are on the move regularly, e.g. from being in the military, or temporary work placements. 

Some factors used to determine domicile include: 

The Tax Benefits of Community Property

Community property has several tax benefits. In the event of the death of one spouse, both partners’ interest in the property get a "step-up" in basis. The property gets an updated tax basis on the market valuation at the date of their death. The deceased spouse legally has a half interest in the entire community property, so both halves of the property receive the step-up in basis, instead of just the deceased’s half.

Say a couple own a house with a basis of $50,000, the amount they initially paid. The house now has a value of $500,000, making each spouse's’ share of the house worth $250,000 with a basis of $25,000.  The deceased spouse’s share now has a basis of $250,000. If the property were not community-owned, the living spouse’s share’s basis would remain at $25,000, and the total basis $275,000. In a community property state, each half would get the new basis of $250,000, giving a total basis of $500,000.

Marital Agreements Mean Fewer Headaches

While community property has some tax benefits, it is easy to see the downsides to the system. But there are ways to protect your assets. When it comes to the potential for divorce, one way to avoid complications from community property laws is to draft a marital agreement, a.k.a. a "prenup."

A prenuptial, post-marital, or divorce agreement can convert community property into separate property in the event of death or divorce. Some states allow you to opt-out of the system without a pre-signed agreement, but others, such as California, are stricter, and there is the chance other states may follow suit. So it is best to sign a formal agreement under any jurisdictions.

When Might There Be A Dispute? 

Disputes can arise upon the death of a spouse, particularly if children are involved. Typically, if somebody dies without leaving a will, their half of the estate goes to the remaining spouse unless they had children from a previous relationship. In which case, the remaining spouse retains their half, but the deceased spouse’s half goes to his or her children. 

Estate planning and making a will can help you or your family avoid extra stress in times of loss. 

What Happens In Cases of Bankruptcy?

In community property states, if one spouse needs to file for bankruptcy, it must include all community-owned property. In many cases, judges will require the other spouse to declare bankruptcy too. Creditors can make claims against community property, and even against the other spouse’s individually owned properties.

Trusts and Dower Rights

Placing your property into a trust has several benefits. 

Three states still have Dower Rights for spouses not on the title to a property. In Ohio, Kentucky, and Arkansas, a widow or widower is entitled to the interest or income from one-third of their deceased spouse’s property.

California land trusts aren’t subject to community property or dower rights, so are a great way to invest without the risk associated with the usual marital property laws in California. 

 

Top 10 Things You Need To Know About Distributions From Your Retirement Account

Congratulations! You've lived long enough to retire or you're almost there.

But before you "cash out" and get your money via distributions from your retirement account, you may want to know what some people learn the hard way.

Let's start with distributions from traditional IRAs and 401(k)s. The first five questions will relate to these traditional accounts. If you have either a Roth account (IRA or 401k), you can skip to number 6 on the list below.

And whether you're getting ready to retire or you have a long way to go, the information below can benefit everyone.

Traditional IRA and 401k Accounts

1. Early Withdrawal Penalty.

A distribution from your traditional IRA or 401k before you reach the age of 59 1/2 will cause a 10% early withdrawal penalty on the money distributed. And yes, you're paying taxes too, so you're losing a big chunk of money if you withdrawal early.

Let's say you take a $5,000 distribution from your traditional IRA at age 50. You will be subject to a $500 penalty and you will also receive a 1099-R from your IRA custodian. You will then need to report $5000 of income on your tax returns.

Long story short: Don't withdraw early unless you really need the money.

2. Required Minimum Distributions (RMD).

But whether you need the money or not, at age 70 1/2, your friends at the IRS will force you to begin taking distributions from your retirement account. Unless you're still employed.

Your distributions will be subject to tax and you will also receive a 1099-R of the amount of money distributed which will be included on your tax return. The amount of your distribution is based on your age and your account’s value.

For example, if you have a $150k IRA & you've just hit the age of 70 1/2, your first RMD would be $5,685 (3.79% of $150k).

3. Don't Take Large Distributions In One Year.

Unfortunately, money from your traditional retirement account is subject to tax at the time of distribution. With this in mind, it would be wise of you to be careful about how much money you take out in one year. Why? Because a large distribution can push your distribution income and your other income into a higher tax bracket.

Let's say you have  employment or rental/investment income of $100,000 yearly. That would mean you're in a joint income tax bracket of 15% on additional income.

However, if you take $100,000 as a lump sum that year this will push your annual income to $150K and you will be in a 28% income tax bracket.

If you chose to instead break up that $100K over two years, then you could stay in the 15% to 25% tax bracket. This way, you reduce your overall tax liability.

Long story short: When it comes time for you to start enjoying retirement, don't take out too much money or the IRS will be enjoying it instead.

4. Distribution Withholding.

Most distributions from an employer 401k or pension plan will be subject to a 20% withholding, unless you're at the age of 59 1/2. This withholding will be sent to your friends at the IRS in anticipation of tax and penalty that will be owed.

In the case of an early distribution from your IRA, a 10% withholding for the penalty amount can be made.

5. If You Ever Have Tax Losses Consider Converting to a Roth IRA.

Roth IRAs are popular for a reason. When you have tax losses on your tax return, you may want to consider using those losses to offset income that would arise when you convert a traditional IRA or 401k to a Roth account.

When you convert a traditional account to a Roth account, you pay tax on the amount of the conversion. This is usually worth it, because you’ll have a Roth account that grows entirely tax free which you won't pay taxes on when you distribute the money.

Interesting fact: Some tax savvy people use tax losses so that they end up paying less in taxes later on.

Tips For Roth IRAs and Roth 401(k)s

6. Roth IRAs Are Exempt from RMD.

It's amazing right? While traditional IRA owners must take required minimum distributions (RMD) when they reach the age of 70 1/2, Roth IRAs are exempt from RMD rules. This allows you to keep your money invested for as long as you wish.

7. "Designated" Roth 401ks Must Take RMD.

Yea, tax code can be confusing. "Designated" Roth 401k accounts are subject to RMD. These kinds of Roth accounts are part of a 401k/employer plan, which is where the word "designated" comes from.

Anyway, so how do you avoid this you may ask? By rolling your Roth 401k funds over to a Roth IRA when you reach the age of 70 1/2.

8. Distributions of Contributions Are Always Tax Free (Unless The Government Changes That)

Unless the government makes major changes, distributions of contributions to a Roth IRA are always tax-free. No matter your age, you can always take a distribution of your Roth IRA contributions without penalty or tax.

9. Tax-Free Distributions of Roth IRA Earnings.

However, in order to take a tax free distribution from your Roth IRA, you must be age 59 1/2 or older and you must have had your Roth IRA for five years or longer.
As long as those two criteria are met, all amounts (contributions and earnings) may be distributed from your Roth IRA tax free.

Note: If your funds in the Roth IRA are from a conversion, then you must have converted the funds at least 5 years ago and must be 59 1/2 or older in order to take a tax-free distribution.

10. Delay Your Roth Distributions.

Don't be so quick to use the funds in your Roth account. It's usually better to distribute and use other funds and assets that are at your disposal. Why? Because those funds aren’t as tax efficient while invested.

Long story short: Roth retirement accounts are the most tax efficient way to earn income in the U.S if you use them right. Learn even more from our other article on the lesser-known benefits of Roth accounts.

That's all folks. As always, if you have any questions, please don't hesitate to ask in the comments below.

Offshore Banking: Everything Investors Need To Know

The concept of banking has been around for about as long as civilization itself. 

In ancient Mesopotamia, temples and palaces often acted as financial institutions, lending seeds to local farmers to plant their crops. Once those crops were harvested, farmers would be required to pay back their seeds. 

Of course, banking has evolved since then. 

Today’s banks continue to provide loans to the communities they serve while giving people a safe place to keep their money. And while most people bank within their country of residence, which is known as “onshore banking,” today we want to look at the overseas alternative, offshore banking, and how investors use it to their advantage.

 

What Is Offshore Banking?

Offshore banking, like onshore banking, provides a safe place for financial customers to transact, but it offers additional benefits that traditional banking doesn’t. Many of these benefits make offshore bank accounts attractive, particularly to wealthier individuals. 

By definition, offshore banking is when a bank accepts and safeguards money from people who live in foreign countries.

When it’s explained in simple terms, offshore banking doesn’t sound so forbidding, does it? So why does the idea of opening an offshore bank account make some people feel like they’ll be joining the ranks of tax-evading criminals in Hollywood films? (We’re looking at you, Wolf of Wall Street!)

While it has gotten a bad rap, such as in the case of the Jersey accounts frozen by Lloyd’s Offshore Banking due to money laundering, the truth is that there have been many more regulations established among offshore institutions and, as a result, it has become more difficult for individuals to indulge in illicit behavior. See our article, Is It Legal to Have an Offshore Bank Account?, to learn more.

In reality, offshore bank accounts are not owned only by criminals portrayed on the silver screen, but also, and more commonly, by everyday people, from travelers to investors alike

Feeling better about the idea of opening an offshore account? Prior to reading the next section, take a quick moment and try to think of your priorities when it comes to offshore banking services. These might be lower tax rates, asset protection, higher interest rates, or just convenience to a place you frequently travel.

 

Benefits Of Offshore Banking

There are a lot of reasons why people might choose to bank offshore instead of confining themselves to domestic banking options:

 

Which Country Is The Best For Offshore Banking?

The best country for offshore banking depends on you and your needs. If you do a lot of business in Asia, Singapore might suit you best. If you’re worried about banks reporting your information, you might prefer to bank in one of the few countries which have not adopted the Common Reporting Standard (CRS), such as Georgia. 

If you want to open an account easily and with a low starting balance, Georgia also checks that box. If you’re looking mainly for asset protection, it’s what Swiss banks specialize in. 

And for the best tax rates around, you’ll find those in the Caribbean. More on that later!

There are quite a few offshore banking countries to choose from. Whether your priority when it comes to offshore banking services is lower tax rates, asset protection, higher interest rates, or just convenience to a place you frequently travel.

 

How Does Offshore Banking Work?

Offshore banking works pretty much like onshore banking, except that it is usually a bit more stringent. For example, in traditional banking you can just walk in with two forms of identification and an initial deposit, and most likely you will be approved. As you will see in the steps below, opening an offshore bank account is more of an in-depth process. 

Since we’ve already established some of the general concepts of offshore banking, as well as what your ideal institution (or institutions) would offer, let’s discuss what offshore banks are looking for when it comes to choosing their potential customers. To ensure that you are fully prepared for opening your offshore account, we’ve highlighted the main steps of the process below. 

Once you’ve completed all of the above steps and submitted any additional requested documents, the average turn-around time is five days. While each case is unique, these are the basic steps of opening an offshore bank account. 

Not too scary, right? Of course not! However, if this is your first time venturing out into offshore banking, I strongly recommend you consult with a professional organization that specializes in establishing relationships with offshore banking institutions. 

As we have established, more and more people are choosing to divide their finances among multiple institutions, particularly into offshore accounts, for a myriad of reasons. 

 

Why Is The Caribbean An Attractive Location For Offshore Banking?

What do you envision when you think of the Caribbean? Okay, I’ll give you about five more minutes to (reluctantly) put down your tropical cocktails and brush the beautiful grains of white sands off your feet.

Are you with me now? Great! Now apart from the impossibly gorgeous tourism, let’s talk about another reason why the Caribbean is so amazing. 

If you only know of, or have read about, offshore banking from the media, the Caribbean is most likely the first or second place that comes to mind. Why is the Caribbean so popular for offshore banking? Since the 90’s, it has been full of tax havens! Tax havens are these wonderful places where you incorporate your business, and, depending on the country, pay little or nothing in taxes. Additionally, many nations in the Caribbean have strict privacy laws and have refused to sign tax treaties with foreign governments. This means what happens financially in the Caribbean, stays in the Caribbean. Particularly for investors, low taxes and financial privacy are the major draws to the Caribbean. It also doesn’t hurt that it boasts some pretty breathtaking backdrops (care to take an impromptu trip to research these points in person?!) 

If you’ve made it this far into the discussion, I’m sure you can see just how straightforward offshore banking can be - just as long as you reflect upon your priorities, choose the right institution for your needs, consult a professional for legal advice, and most of all, be sure to report all of your accounts accurately because you definitely want to remain on Uncle Sam’s (or Johnny Canuck’s) good side!

 

Liability: Legal Definition and Real-World Examples for Investors

Some of the basic questions we get about liability include: 

Liability is basically any reason you might end up in court. Think of liability as the lifeblood of a lawsuit. Lawsuits tend to resolve in either settlements or judgments, some common misconceptions about liability and lawsuits.

 Legal Definition of Liability

“Responsible for or answerable in law” is the exact legal definition of liability. Essentially, if someone is “found liable,” this means they are on the hook for any damage or harm caused in the situation and can be required to pay for your mistake or oversight. 

Liability doesn’t always include malicious intentions, such as blatant fraud. In the real estate world, most liability issues are accidents. A real estate investor can be held liable without intentionally doing anything wrong. Here’s a real-world example where an investor got legal documents online and ended up getting more than he bargained for: 

Example: When Online Contracts Come Back To Bite You

Paul decided to buy a small home in Florida and rent it out for profit.

To save on expenses, Paul decided to print a template rental agreement off of the internet. “Why hire an attorney,” Paul reasoned, “when I can find what I need online for free?” He read it over, and it seemed to cover all of the basics. He typed his name and address at the top and called it a day.

Paul quickly found a tenant, a law student named Ed, who paid him a $1,200 security deposit and $800 per month for rent. Ed signed a one-year lease and the aforementioned rental agreement. Ed was a model tenant. But a year later, Ed wanted to marry his longtime girlfriend and move in with her. He left the property in the same condition he found it, and asked for the security deposit back.

Paul referred back to his rental agreement, which stated that he would return the deposit within 90 days of Ed moving out.

Then 83 days later, Paul received notice that he was being sued. He was understandably confused—according to the document, both he and Ed had signed, he still had a week to make the payment!

Here’s what Paul didn’t realize: Florida law requires security deposits to be returned within 15-60 days of the tenant moving out. Ed learned this in a law class, and when he couldn’t immediately reach Paul, opted to sue for the return of the deposit. The suit pointed out that Paul also neglected to include a copy of Florida Statute § 83.49(3) in the lease, as is required by state law. Paul found himself in Municipal Court by a first-year law student and now had a whole new headache on his hands.

The first mistake Paul made was using Google, J.D. in place of an actual real estate attorney. A lawyer would have quickly caught the unenforceable part of the contract and made the necessary revisions. That same lawyer also would have advised Paul about his responsibility to include the state statute in the lease. By trying to save a few dollars, Paul ended up costing himself way more time and money dealing with the issue in court.

The second mistake Paul made was not handling the security deposit properly. Breaking a state law is pretty much a way to guarantee you will be sued. The moral of this story for investors is that you should always be educated on state laws and common situations that can turn into lawsuits. This is why you want a real estate attorney in your corner. We know attorneys aren’t cheap—but would you rather spend some money now to stay out of court altogether, or risk it all when someone does sue you?

To better understand how to avoid the courtroom, let’s look at five of the most common situations that can get a landlord on the business end of a lawsuit.

 Let’s take a closer look at how proactivity can keep you out of court.

Common Types of Lawsuits

Real estate investors should be aware of some of the common situations that get landlords into court. Once you are aware of these issues, you can anticipate them. Some of the most common types of suits arise out of the following situations:

Good communication, documentation, and legal counsel can help you avoid many of these issues. Still, you should approach all of the above situations with caution and be proactive.

Avoiding Liability

Fortunately, there are many legal tools available for real estate investors when it comes to avoiding liability. The basics include:

While a lawyer can argue against liability in court, we find that with asset protection strategy that includes these tools, you can literally stop a lawsuit before it’s even filed.

Bottom Line: Contain Liability and Prevent Lawsuits with Asset Protection

You’ve already taken a critical step toward protecting yourself as an investor. Now that you have a basic understanding of liability, you can begin taking steps to avoiding personal liability and liability for your business.

The goal of asset protection is, obviously, to protect what you own. We found the best way to accomplish that is to make yourself impossible to sue. If you are sued, a properly-employed asset protection plan will protect your personal assets and make the target of your lawsuit a company that doesn’t own anything for the other party to collect even if they do “win.” If there’s nothing to gain, most people won’t bother with the expense of even filing a lawsuit in the first place. As with any fight, you shouldn’t make yourself an easy target.

Investment Options for Your Self-Directed IRA

One of the best things about rolling over your retirement assets into a self-directed IRA is that it opens up a wide range of investment options—including our favorite, real estate.

Typically, IRA investment options are limited to stocks, mutual funds and bonds. Holders of a self-directed IRA, however, can also invest in:

With all those options, more and more individuals are converting their traditional IRAs to self-directed IRAs to take advantage of a very favorable market. There are, however, certain rules and restrictions that need to be followed in order to enjoy tax-free and tax-deferred status.

Investment Restrictions for Self-Directed IRAs

The IRS does not list what self-directed IRAs are allowed to invest in. On the other hand, it provides a detailed list of prohibited transactions and specifies what individuals are not allowed to invest in. Generally speaking, you cannot directly benefit from any investment you make with your IRA. For those that own property, the property must be held in the name of the IRA trust and not your own. Rent, for example, would be paid directly to the trust.

In addition, you can not hold property in your IRA that either you or your family members benefit from. This includes homes, businesses, and loans. You can’t borrow against your IRA to start your own business. Generally speaking, if you or your family reap immediate rewards from the holding of an asset in your IRA, that is disqualified.

While certain assets are restricted by the IRS, the IRS is most concerned with who is benefitting from the holding of the assets in an IRA. If it’s you or a member of your family, that will raise their eyebrows.

Investment Possibilities With Your Self-Directed IRA

Self-directed IRAs significantly expand your options. They also afford you all the benefits that IRAs have to offer. What are some of those options and benefits?

Tax Deferral

Both traditional and self-directed IRAs enjoy tax-deferred status. Roth IRAs are essentially tax-free. Due to this preferred tax status, the IRS insists that certain rules are followed. Nonetheless, returns and contributions to non-Roth IRAs are tax-deferred. You won’t begin paying a dime in taxes until you begin taking distributions.

Roth IRAs, on the other hand, are taxed on their way into the account. You won’t pay taxes on either distributions or gains. Contributions to the Roth, however, are not deductible. There are also limitations on what you’re allowed to contribute depending on how much you make in a year. This is something to bear in mind when considering a Roth IRA.

Real Estate

Real estate is one under-utilized option for self-directed IRAs. So long as the real estate is property of the IRA trust, any money that the real estate generates is allowed to be entered in your IRA tax-deferred. This can include rent or gains from the sale. One restriction, however, is that neither you nor anyone in your family is allowed to reside in or take advantage of the property in any way. That would create a conflict of interest and potentially void your IRA.

Stocks, Bonds, and Mutual Funds

IRAs are set up to receive passive income from such things as dividends. In fact, the IRS prefers that you pad your IRA with passive earnings. Traditional or non-self-directed IRAs relied on bonds and mutual funds to accrue value. You can still invest in stocks, bonds, and mutual funds, but with a self-directed IRA, you can choose which ones you invest in.

Precious Metals

While the IRA expressly prohibits the use of your IRA to invest in collectibles, there are certain kinds of coins that gain their value intrinsically from what the coin is made of. Instead of being an investment in the coin, it’s considered a precious metal investment. The U.S. government mints such coins for this express purpose. So do most major countries across the globe. These coins are largely considered an acceptable form of investment for your IRA.

Tax Liens

Another interesting option for your self-directed IRA is tax liens. Essentially, the government will sell liens on real estate where the owners have failed to pay property taxes. They will recoup their money in this manner. Meanwhile, interest is building on the unpaid taxes. If the owner fails to pay at all, the real estate will become property of the IRA. For the last decade or so, tax liens on real estate have become a very lucrative investment. With your self-directed IRA, you can reap the rewards tax-deferred.

Private Businesses

This is a bit tricky, but it can be done. You’ll need to bear in mind that you cannot purchase an interest in any business belonging to “disqualified” persons. This basically includes anyone in your family or yourself. The IRA can own an interest in a business and have profits paid to the account, but the disqualified persons statute of the IRC must be abided absolutely. Otherwise, you risk the IRS considering the transaction a distribution thus voiding the IRA entirely.

Loans and Notes

You can purchase notes or make loans using your IRA. However, the same rules concerning disqualified persons still apply. Likewise, you can’t borrow against your IRA.

Foreign and Cryptocurrencies

The IRS permits investors to use their IRA to invest in both foreign currencies and cryptocurrencies. Cryptocurrencies have made a lot of headlines recently, but the jury is still out on whether or not they constitute a good long-term SDIRA investment. It seems that if the technology to process transactions improves over the next few years, as everyone expects it will, then cryptocurrencies could represent a major disruptive technology that would change the face of global commerce forever.

Foreign currencies also represent an excellent investment option as they offer easier liquidity than stocks or bonds.

The Bottom Line

Self-directed IRAs have many advantages, not the least of which is that they allow tax-deferred earnings and unmatched investment options. Using your self-directed IRA to secure your future has never been easier or more effective.
 

 

Benefits Of LLC For Rental Property Ownership

As a rental property owner, you are accustomed to solving many different kinds of problems. Ensuring you are protected in case something goes wrong is one of the problems. So we're going to talk about the benefits of having a limited liability company (LLC) for rental property investing.

This is where many owners will say, “I have asset protection insurance, so I am protected if something bad happens” It is true that insurance covers accidents, but you'll start to understand the benefits of using an LLC  for rental property ownership if you watch this video:

Why an LLC Can Protect Assets Better Than Insurance

Insurance will not protect you from most lawsuits regarding the buying and selling of real estate. Every time that you're entering into a contract, selling a piece of property, or leasing property to a new tenant, insurance doesn't give you the asset protection strategy you need.

This happened to one of my clients after the sale of a property: After the sale took place the buyer emailed asking if my client had replaced the plumbing under the house. My client simply replied via email that he had replaced, “all of it.” In the context that would be understood as all the plumbing under the house. However, the buyer misinterpreted that email as referring to all the plumbing in the house.

These types of miscommunications happen all the time. Especially now that texting is more and more common between renters and their landlords! This is only one example of an issue that insurance may not cover. This is where the LLC comes in to save you.

Benefits of Owning an LLC For Rental Property

Real estate LLCs are powerful entities that separate the liability of your asset from your personal name. When there is a lawsuit against your rental property, it cannot impact your personal assets. It also means that if you are personally sued, your LLC assets will be protected. In addition, when a lawsuit occurs against the LLC, it will not impact your personal credit score.

Operating an LLC is quite simple, but must be done properly in order to reap its benefits. Forming an LLC is quite straightforward, but needs to be done correctly the first time. To create an LLC you need to select a name for the LLC that the state approves. After that, you choose a registered agent. You will need to file the Certificate of Formation and create an Operating Agreement. Finally, the state will assign you an Employer Identification Number (EIN.)

One LLC is Great! How About More?

An LLC is a great entity, but your rental property still holds a lot of liability. No investor likes having the possibility of losing an entire property to a lawsuit. Because of this, many will create additional layers of defense. The first of these layers is a secondary LLC. This LLC carries out the operations of the company. People refer to this LLC as a “shell company.”

The operations LLC doesn’t own any property. It simply functions similarly to a property management company for your “asset holding LLC.” That means it collects rent, pays contractors, and carries out the operations of that property. This tag-team duo is called a two-company structure. The operating LLC holds most of the liability and is most likely to be sued. However, you only risk the money in THAT LLC. The asset-holding LLC is not involved, and thus the rental property is still legally separated.

Have more than one rental property? You can scale your asset holding LLC up to a Series LLC. This entity scales infinitely with your portfolio. In this case, you can still be using the operating LLC to carry out the activities for all these different rentals without risking any of your properties directly.

Protect Your Investments From Claims

An insurance claim usually results from a "slip and fall" on a property or something else you would normally characterize as an accident. Typically this is what your insurance is willing to cover. But your insurance doesn't cover you for any intentional acts that might occur.

What's considered an intentional act? Well, that depends on what you consider to be intentional. And that's where the law comes in!

In the example above, my client was hit with a lawsuit alleging intentional fraud, an incident that insurance doesn't cover. Yet even after this simple misunderstanding, my client walked away from that lawsuit without paying a dime. This was all because she had a proper asset protection strategy in place.

Benefits of Forming an LLC (And A Few Risks)

By reading this article you are either a real estate investor or an aspiring real estate investor. You have surely talked with people discussing LLCs (Limited Liability Companies.) One of the struggles investors run into is finding reliable information that they can trust. Learning about the benefits of forming an LLC is no different.

Today I will tackle how to start an LLC. I will also list the risks involved in operating an LLC. After all, knowing the weaknesses of an entity can allow you to build a stronger strategy. This allows you to sleep well at night knowing all your bases are covered.

Benefits of an LLC

There are many benefits to using a LLC as the foundation of your real estate business. The most important benefit is that this entity limits liability and minimizes personal exposure in the event of a lawsuit. When a LLC owns a property it will be responsible for the property in court, not you. If the lawsuit it lost, the losses are limited to what is in the LLC.

Avoids the issue of “double taxation.” The LLC gives you the ability to file the property as a pass-through entity. You list any profits, or losses, on your personal tax return. But LLCs are flexible! They can be taxed differently depending on your needs. See our article on the tax benefits of the LLC for more.

The LLC can be formed and operated in all 50 states and is uniformly upheld across the United states. You can choose to form a LLC in your local state or in a any other state, depending on your needs.

A LLC can also function as a “operating company.” Sometimes also referred to as a “shell company.” Using a LLC in this way allows investors to limit their exposure even further! Utilizing a LLC as an operating company means that it holds the liability for your business operations. The difference is that you don’t place any assets in it. When it gets involved in a lawsuit you aren’t risking your properties, just your LLC. This article and video explains what this structure will look like.

 

Risks of an LLC

There is no “perfect” business entity, and the LLC is no exception to this rule. The important thing is to understand its strengths AND weaknesses to ensure your asset protection strategy is effective.

Most LLCs will have an annual fee and corporate management requirements. This will vary from state-to-state, so be sure to know what your state requires.

You need to form and operate the LLC to ensure it provides the liability protection you want. If you don’t form and operate the LLC properly, you are investing into an entity that does not protect you! This type of work needs to be done right the first time. You can also pay someone experienced who will file the entity and teach them you how to operate it right from the start.

The LLC will require separate banking, records and tax returns. This is to ensure that you are able to prove it operates separately from you. This also means more work for you. Once you get the hang of these entities it is very simple, but the learning curse can be rough.

All properties owned by a LLC are held in a “pool,” and are not protected from each other. This is why we recommend that investors with more than a single investment property use the series LLC instead.

How to Protect Yourself as a Real Estate Money Partner

One of the more elegant features of the real estate world is the way the whole ecosystem encourages symbiosis. Investors often are stronger together, especially in the face of an obstacle. For most investors, start-up capital or even cash flow to expand will become issues at some point in an REI career. Money partnership is one creative way REIs are helping each other by offering complementary skills to one another and combining forces on an investment. This is a clever way to square a capital issue or get help finding deals, depending on your role. Everybody wins when these arrangements work out. Here are some of the things you need to know to make sure yours does.

Money Partners and Credit Partnerships Explained

The money partner is the term for the person in this arrangement who has capital to spare. As for the person that has time or scouting skills or other resources, they are sometimes called the entrepreneurial partner. Other terms for these types of arrangements include credit partnership and partner funding.

Many of our investor clients are at the stage in their careers where they’re richer in capital than time. But don’t get discouraged, most beginners start out rich in resources other than cash. It may be your willingness to spend time researching, number-crunching, your day job skill set, or even your charm or tenacity--but there is certainly something about you that makes you valuable to another investor even if you’re cash-poor. Eventually, as your career progresses, your time will become “expensive” enough that you may assume the other role. Many REIs transition into mentorship.

How to Protect Yourself as a Money Partner

If you’re the “bank” in any kind of deal, you’ve got to look out for yourself. Money partnerships aren’t any different. You’re taking a risk, so of course you want to take the steps you can to mitigate that risk. Here are some of the most important tools you can use to keep yourself protected.

Option #1: Create Clear, Thorough Contracts

If you’ve got concerns about what your new partner may do if they’re not responsible in their duties. But that’s why the smart folks in our early legal system (and its predecessors) gave us contracts: to get everyone’s roles, responsibilities, and rewards in ink. Simply using basic contracts to solidify your verbal agreements can prevent nasty disputes, and even lawsuits, down the road.

If you have specific concerns, address them in the contract. Ask your attorney what some wise provisions would be given the specific fears or worst case scenarios you’re aiming to prevent. Odds are good you can rule out a lot of shenanigans by simply taking the time to create an effective contract. Anyone who wants to make money with you should be willing to sign a contract with fair, reasonable, comprehensible terms.

Option #2: Use Entities To Limit Your Personal Liability

Where a contract can’t always help you out is in the realm of lawsuits. Unfortunately, partners sometimes get bad blood. Deals sometimes don’t go as planned. Of course, most people get angry and play the blame game. Some people’s preferred venue for the blame game just happens to be the courtroom.

Don’t become a victim to your partner revealing themselves to be bitter or litigious. Protect yourself by creating an LLC and operating it in a manner to a venture-specific LLC. Use your Operating Agreement to clarify your relationship to as fine a degree as you like, and even divvy up profits and losses as you agree is fair. The great thing is you can have equal power if you like, or a money partner may want a greater share of profits. These are all the details you can get on paper when you file your LLC, but filing your LLC serves a second purpose: asset protection.

The LLC limits liability around real estate investments. Moreover, a Traditional or Series LLC separates you from the asset and its problems. You’re separate and no longer “own” it, but control it. What’s great about not owning something is it’s impossible to lose it in court. But of course, you retain legal control. Clever business structures can have many benefits on top of helping you CYA in a money partnership.

5 Strategies For Protecting The Equity in Your Personal Residence

Equity stripping is something of a varsity-level real estate move, but it’s also an asset protection classic for a reason. The whole idea is to make your property look extremely undesirable on paper, even if it’s a beautiful and pricey asset to behold. Today, we’ll be talking specifically about five ways to protect the equity in your homestead or personal residence, and you’ll be icing greedy litigants and creditors in no time when you follow our tips.

1. Know Thy Homestead Exemptions (And Use Them!)

Ah, the homestead exemption, arguably one of the best “gimmes” a homeowner can get on the equity stripping front. Understand first that American law provides greater protections for our personal homes than any investment. 

Now, the exact value of your personal homestead exemption depends on a variety of factors, including where you live. Each state’s formula for calculating homestead exemptions is different, so your mileage may vary. But everywhere that has a homestead exemption option is giving its homeowners a gift of sorts. For instance, one of this tool’s main uses includes capping creditors’ abilities to tap into your home’s equity to satisfy a debt. If your state offers an exemption, you should most likely take it (unless professionally advised otherwise).

If you do some research and learn your state doesn’t offer such an exemption, don’t fret. That’s what our next four tips are for, and you can make up the difference by using some of the other tools explained here such as home equity loans and lines of credit. 

2. Obtain a Friendly Loan

Friendly loans may come from actual friends or even institutions where you have a good reputation or rapport. Any loan with good terms or lien constructed deliberately for equity stripping likely meets the investing definition of “friendly” lending. There’s nothing inherently unfair, wrong, or illegal about receiving a favorable loan or gift from a person or business. 

Of course, finding and securing friendly loans can be tough, particularly for newer investors or homeowners. Those who follow our next tip won’t have this issue.

3. Create Your Own Mortgage Company 

Even seasoned REIs rarely know you can legally do this. Creating your own mortgage company for equity stripping is surprisingly easy, and incredibly effective. You use your own Traditional LLC to issue yourself notes. You can proceed to use it for your homestead or your investment assets, assuming your coloring within the lines of the law.

Learn more from our explainer on how to form your mortgage company and start your equity stripping strategy. This basic premise can be used to completely encumber a property, making it repulsive to the career litigant and (often more importantly) their attorney. After all, the lawyer who sees equity stripping knows they won’t be getting paid. Not until the mortgage is paid off, anyway. And given you’re the one setting up the terms, you can make this part easy.

4. Use a Home Equity Loan or Home Equity Line of Credit (HELOC)

Both home equity loans and home equity lines of credit (HELOC) offer handy tools for the homeowner in need of equity stripping. The loan version is limited to the amount of equity presently in your home. Those who take out home equity loans receive the equity value in a single lump cash sum, a “riskier” move for the lender than a line-of-credit. 

By contrast, HELOCs are easier for most people to qualify for, and for many homeowners, easier to manage. When you have a HELOC, you only touch the money when you need it or for a planned reason. Both of these home equity-reliant options encumber your home further, serving your creditor and asset protection goals.

5. Second Mortgages May Be Options for Seniors

Qualifying seniors who own their homes outright may use second mortgages as both a way to get some much-needed cash on a fixed or dwindling income and for protecting their homes. Second mortgages may be difficult to qualify for, will be limited to seniors with high equity in the home, and can certainly have drawbacks, so learn the specifics about second-mortgages before considering using this type of encumbrance for equity stripping.

The Real Estate Investor's Guide to Acquiring Foreclosed and REO Investment Properties

Warning: We cannot print today’s pieces without a frank discussion of the “f” word. Yes, the “f” word.

Foreclosure. It’s a fate we all hope to avoid personally. But as real estate investors, we also know that foreclosed homes may offer us tremendous opportunities for profit, incredible deals, and epic upselling after appreciation works its magic.

Acquiring properties that have been foreclosed, are owned by banks, or are otherwise underpriced because of related issues is a smart investing strategy for many REIs. If you’re thinking about going this route, you can’t afford not to know the following information about why and how to buy these discounted properties. Read on to learn more about REO investments, foreclosure, and how to make these assets into your next profitable investment properties.

What is an REO Investment?

An “REO” is a term for a bank-owned property. “REO” just stands for “Real Estate Owned”--meaning someone already owns the property. In the case of REO properties, that someone is always a lender. These lenders are, more often than not, banks. So all “REO investment” really means is just that the property is purchased straight from a lender, not a person.

Another thing to understand is that these aren’t “short sale” homes. “Short sales” are usually where investors can find major steals. In these sales, a homeowner is selling their home for less than they currently owe on the mortgage. Foreclosed homes have essentially been sold in this fashion back to a bank.

At that point, most banks mark the price way up--back to what the asset’s original value was, most of the time. After all, even banks want to make their money back. By the time the foreclosure is complete, the bank becomes the owner and seller. They can make any demand they like. Smaller banks may offer great deals on their homes.

What are Some Benefits of Buying Foreclosed Homes as Real Estate Investments?

The foreclosure auction can be the deal-hunting real estate investor’s best friend in this department. This is just one of your options for shopping around, but first, let’s get into why you might want to:

 

 

This is just the shor tlist of some of our favorite perks of these properties. Of course, you may reap additional benefits we can’t list because they honestly warrant an entire article of their own. But these are some of the very basic reasons why people love hunting for REO or foreclosed homes. They can be a dealmaker’s delight.

The REI’s Guide to Buying Foreclosed Homes

If the auction isn’t your scene, of course you can also buy a foreclosed-upon home directly. You’ll generally follow the same basic steps, but of course, check with your own real estate attorney before you purchase any major assets. That said, this is the basic outline of what you have to do to legally and safely acquire one of these properties:

  1. Assemble your team of qualified professionals. Most folks like to have at least an attorney and a real estate agent on their dream team.
  2. Defend your offer. Even a verbal promise is better than nothing, but ideally you’ll be protecting yourself down the line with real estate contingencies that allow you to back out at no cost if the property “fails” any of the next steps. See our previous pieces on crafting real estate contingencies to your advantage for more information.
  3. Have the property thoroughly inspected. This will help immensely with the next steps.
  4. Weigh the pros and cons of purchasing this investment. Consider your portfolio, return expectations, the amount of time you have (if any) to put into renovating this property, property management costs, and of course, a good 20% buffer never hurts a pro forma. You can also ask your team of advisors their opinion on your investment opportunity.
  5. Get the property professionally appraised. Only a real-deal appraisal will give you the true value of the home. This is vital for determining whether your deal is worth the amount of time and effort (as well as money) that you have to invest in this new acquisition. It can also become enormous leverage at the negotiating table. Getting additional discounts on these homes is easy for the deft negotiator.
  6. Bring in experts if necessary. Should any special issues arise during inspection around local law, water, ground coverage, or any other impediment to your ideal use of this property, don’t be afraid to have an expert in whatever subject come on down. You can usually secure experts quickly and easily on most common real estate problems, assuming both buyer and seller have a desire to fix the issue. While you get obvious negotiation power in such situations, you can simply ask to have the problem fixed. It’s best in our opinion to invest more in due diligence and addressing all potential issues prior to purchase than to buy on a whim and handle everything “later.” 
  7. Make your offer. If you’re buying a bank-owned property, understand you’re likely to pay sticker price for foreclosures. If you know ahead of time sticker price is well within your budget, make the exact offer if you wish to expedite things. You can try to bargain, but frankly your odds of success may vary wildly between institutions.
  8. Close. Grab your keys and get to work. You’ve either got some remodeling to do. some tenants to find, or some property management contracts to sign. Get any third parties you may need to run your real estate business.

Don’t Forget to Cover Your Assets

Buying a foreclosed or bank-owned property is no different than making any other investment from an asset protection standpoint. Ensure you handle this property exactly as you would any other REI asset from a legal standpoint. If you normally buy with your Traditional LLC, do that. If you secured financing in your own name and have a land trust ready to go, proceed with your plan. If you don’t have an asset protection plan at all, it’s time to start learning about asset protection at the very least. Ideally, real estate investors should have a trustworthy attorney who can answer asset protection questions.

Of course, asset protection experts and firms exist for a reason as well. You’ve got options for protecting your new asset, so get a plan that’s customized to maximize your business’s profits, tax savings, scalability, and success. You can find an expert on any budget to help you out, but above all, don’t hold any real estate assets in your own name over the long term. You’ve got so many alternatives that there’s no excuse, so start planning before you even think about buying.

Bottom Line: The Savvy Investor Can Win on Good REO and Foreclosed Properties

If you take nothing else away from this article, simply understand that making deals with the bank is a bit different than making deals with a person. This basic truth is the root of most of the confusion around foreclosed and REO properties. But since you’re no longer confused, you can start considering whether such investments have a place in your portfolio. Your answer will likely depend on many factors, including your age, sex, location, main career, investment class preferences, investment strategies, aspirations for your portfolio, and other highly personal details. 

But for now, at least you know the basics of how to intelligently vet and purchase these properties. Your team of advisors and even your personal investing network is likely full of insight on the foreclosure opportunities in their respective local markets. Asking around can often be the beginning of a beautiful learning experience. So don’t be afraid to ask around about how foreclosure and REO deals have gone for others in your personal and professional network.

Considering A Reverse Mortgage – A Unique Cash Flow Solution for Secure Seniors

Reverse mortgages have gotten more than their fair share of both good and overwhelmingly negative press coverage, so it’s no small wonder most investors and seniors are confused about what they even are. As retirees face longer life expectancies, many outlive their personal savings or Social Security plans, face mounting medical costs, and find life generally costs more than they’d planned for. A reverse mortgage may seem like an enticing way to solve many problems at once, but of course, you should never dive into any financial “solution” without understanding it well.

Today, let’s clear up some of the misunderstandings that make the world of reverse mortgages seem more mysterious than it is. We’ll talk about what a reverse mortgage really is, how this cashflow option can help certain secure seniors, which drawbacks to consider, and what to keep in mind when deciding if you’d personally like to exploit the reverse mortgage in your own real estate investing strategy. Making the best decision will require you to have lots of information. Let’s start with the basics and work our way out to the kinds of details you’ll want to ask about down the road.

What is a Reverse Mortgage?

A reverse mortgage is a type of loan specifically available to seniors over age 62 and federally insured. It gets its name from its unique ability to allow you to borrow against the equity stored within a home already. Those of you who own outright or are close to doing so may have even gotten marketing calls from institutions that issue reverse mortgages, particularly after your 62nd birthday.

Some of the basics to know about reverse mortgages include these rules:

Why Would Senior Real Estate Investors Be Interested in a Reverse Mortgage?

Well, first, only those over 62 get access to reverse mortgages at all. But beyond this, there are reasons certain seniors may want a reverse mortgage. There are still other reasons that are unique, or made all the more pressing, if the senior considering a reverse mortgage is also a real estate investor.

Any senior experiencing cash flow issues, whether they’re as a result of an investment gone awry, out-living or under-projecting retirement savings, medical costs, the difficulty of living on fixed income, or any other reason, may consider a reverse mortgage if they’re eligible. If you have high amounts of equity in your home or own it outright, this loan option offers flexible disbursement options, meaning you don’t have to borrow the full value you can. Just take what you need.

Many seniors find this solution helpful when they have a definite, short-term need that a definite amount of cash to fix. If your need is more about your long-term budget, try to put a number on what you need for say, one year. Coming up with this type of metric will help you and anyone assisting with your financial planning determine your exact cash need, thus helping figure out what a good conservative loan amount for you might be.

What Are the Biggest Benefits of Reverse Mortgages?

Nobody would be getting reverse mortgages if there weren’t very real benefits for some seniors. The biggest issue to keep in mind as you learn about this tool’s benefits is whether they outweigh the drawbacks discussed later in your own personal situation. 

You may find that answering questions about your status and goals honestly saves you lots of time, and fees, on having to pay a lawyer to review the basics. They’re your advisor, not your teacher. Lawyers are all-too-happy happy to teach, just understand that you don’t need to pay for this service.

Flexible Lending Options

Investors may choose to accept the loan as one single lump sum, in monthly installments, or even as a line of credit. This amount of control the borrower has in this regard is greater than most loans. Borrowers may choose the most conservative option that will serve their needs, a luxury not typically afforded to those seeking loans.

Comfortable, Cash-Friendlier Lifestyle

No doubt, very little cash can be converted into a great degree of comfort if you’re smart about it. If you just want to live out your golden years comfortably, you can do so and even plan to pay your mortgage off while you’re still living. We’ll discuss below why to always account for reverse mortgages in your estate plan, but for now, if you want to live it up, a reverse mortgage is an option.

Interest Limits 

The reverse mortgage has an interesting set of rules regarding interest. On the plus side, you’re not charged interest while you continue to live in the reverse-mortgaged home as your primary residence. Interest is also capped on the first $100,000 worth of debt. 

What Are the Drawbacks of Reverse Mortgages?

There isn’t a financial option we’re aware of that’s all “pros” and no “cons.” Let’s break down the downsides of reverse mortgages.

Deceptive or Inflexible Terms

Sadly, not all mortgage providers are ethical. Those targeting seniors may attempt to exploit their clients perceived lack of sharpness or assume you won’t do your due diligence. To this, we say prove them wrong. Vet your company before considering a loan, and have someone you really trust who understands every word read the fine print. This could be a CPA, financial planner, family member working in the industry, or even another investor you know who’s successfully used a reverse mortgage and knows what to look for. You’re looking for anything that sales reps haven’t disclosed,terms you don’t agree to, or red flags of any sort. These are immediate cues to shop around and look elsewhere. Not all lenders will offer good terms, even if you’re lucky enough to only ever deal with the ethical ones (and few of us are so fortunate). Be on the lookout for inflexibilities as well as poor terms. For instance, reverse mortgages are often difficult to refinance, a fact that makes them less than optimal choices for some. See if this will be the case with your loan, and even ask your salesperson to see how honest their answer is compared to what their literature states. Any time a salesperson’s word vastly differs from a written offer, be skeptical.

Your Loan May Become Your Family’s Debt

If you fail to make an estate plan or somehow account for a way to pay your debt immediately in the event of your death, your reverse mortgage may be subject to probate. Your heirs, which for most people are their family and loved ones, don’t get to touch an estate while it’s being probated by the courts. If you die with a debt, it gets passed on, just like your assets and earnings do. So your heirs will be able to pay debts from your estate, but let’s just say the worst-case scenarios around this issue are heartbreaking, lengthy, frankly exquisitely boring yet brutally legalistic affairs. 

If you decide to pursue a reverse mortgage, you can offset this downside by minimizing your loan to what you’re certain you can pay directly from your estate and updating your estate plan to account for the reverse mortgage. This way, your attorney’s already involved and can give additional personal advice on how to address your situation. Often, you can make plans to avoid estate planning surprises--simply remembering to is the most difficult part. 

Our suggestion is to take care of this detail immediately if you end up seeking the loan. You may pay it off while alive or pre-arrange for your estate to make payments, but be advised interest will likely rise if you wait and let your beneficiaries pay off the debt. 

Assets Encumbered by Debt Can’t Pass to Heirs

Suppose you take out a substantial loan against your home’s equity because of its perceived safety. If you’re unfortunate to pass away before making payment or fail to update your estate plan, your heirs may be unable to inherit the home with the reverse mortgage until the loan is paid off in full. If you lack the funds in your estate, that could mean one less asset for your heirs, or at least a substantial barrier to receiving their full inheritances.

Limits and Difficulties Securing Other Types of Loans

Some seniors who take out reverse mortgages later find it difficult to secure additional lending elsewhere. A reverse mortgage is fairly easy to obtain if you meet the qualifications, but it doesn’t necessarily “look good” to traditional hard lenders. This can be problematic for investors who rely on good terms to make their deals profitable. 

Stay Out of Trouble if You Choose to Use Reverse Mortgages

As long as you understand the deal you’re going to sign, you should be able to intelligently decide whether the reverse mortgage will help you, particularly if you’ve got pros to help you make the judgment call. Even a close network of fellow REIs, homeowners, and smart borrowers with experience in reverse mortgages can be a valuable source of information, as can educational resources like this very online article. Learn what you can, shop smart, be skeptical. Professional advice, planning ahead, and practicing due diligence can keep you from becoming a horror story.

How to Control Property Without Owning It: 3 Simple Methods

We often emphasize that fabulously wealthy folks don’t own assets, they control them. It’s something we point out often at Royal Legal Solutions, because you don’t have to be rich (yet) to borrow a few things out of the Fabulously Wealthy Playbook.

Let’s do a quick crash course in the top legal ways to control property without owning it for asset protection purposes. 

Method #1: Use Land Trusts

The handy anonymous land trust is one of the easiest methods of controlling property without owning. The trust simply holds title to the property for you, removing your name from any public record. You get anonymity, become tougher to attack legally, and are legally separate from the asset but reap its rewards as the beneficiary of your land trust.

Method #2: Use Liability-Limiting Entities Like LLCs and Series LLCs

Another great way to control an asset is with an entity. We like those that limit liability, because they help protect your assets in the event of a lawsuit or threat. 

Examples of the kinds of companies we’re talking about include:

Each of these entities offers liability limitations inherently. You’re separated from your assets and any claims around your real estate can’t affect your personally. So say a tenant goes careening through your deck and hurts himself. He may try to sue for your property. 

Depending how you set up these entities, you can either stop the suit before it starts or make it a complete waste of the tenant’s (and more importantly, his attorney’s) time. Entities can be structured to separate assets from each other, limiting how much anyone can receive by court judgment. If you set up your companies with an attorney’s help, you can own them completely anonymously, making a lawsuit nearly impossible to file. Either way, companies are much tougher to sue than people and one of the smartest ways to control property.

Method #3: Use a Shell Corporation for Property Ownership

Why should you risk exposing your personal self or assets to the world? A shell corporation can do this for you and streamline your real estate investments, too. Most investors will find the Traditional LLC works just fine for a shell corp. If you already have one and it has never held your assets, you may consider using it.

Otherwise, you can easily form your LLC; property ownership and ALL of your other real estate investing operations can be performed from there: collecting rent, paying property management, etc. 

Next, you’ll need an asset-holding company for your properties. We recommend the Series LLC if you’ve got more than one property or ever plan to, because the Series LLC is a cost-effective, scalable entity option. 

All this company ever does is hang onto your assets for you. NEVER do business from your asset-holding company: that’s your shell company’s job. With this kind of structure, your two companies exist to handle assets and operations 100% separately and independently of one another. 

For a deeper look at all this stuff, check out our article, Control Without Ownership: The Smart Way Real Estate Investors Own Property.

Equity Sharing for Real Estate Investors: Methods for Acquiring & Protecting Your Shared Asset

Equity sharing is an increasingly popular way for investors to reap the rewards of investing even if they’re strapped for time or cash. Such arrangements can allow cash-poor or newer investors with time for pavement-pounding/vetting/reading to team up with time-strapped investors who like funding smart deals.

Equity sharing may benefit any investor. Those trying to break into REI, take heart that finding excellent deals is an incredibly valuable skill. A deal-finder will always find deal-funders.

To learn more about equity sharing arrangements, reasons real estate investors consider them, how common arrangements work, and protecting your assets when sharing equity, read on. If you want to learn a lot about equity sharing very quickly, you’re in exactly the right spot. 

What is Equity Sharing for Real Estate Investors?

Equity sharing may refer to any situation where one investor pairs with others to afford, finance, and purchase an asset. The investors split all profits or losses at the ratio the agree to (which need not be “fair” or even provided all agree).

Everyone involved in sharing equity has interest in the property. Family members sometimes use equity sharing to help transition mortgaged homes to the next generation, but our discussion is confined to REI today. In these cases, the interest is a business one. Equity sharing may be used to:

Equity sharing looks as different as the investors involved, but we’ll show you examples of your best options for asset protection of equity-shared properties. First, let’s look closely at why REIs get into equity sharing

Reasons Real Estate Investors Consider Equity Sharing Arrangements

We alluded above to one huge reason these arrangements work between investors: different investors bring different skills/abilities, pool them, then agree to share any profits or losses from the asset they have in common. While an investing newbie and more experienced partner are a common combo, the powers of any investors can be “pooled” in a complementary way. Some people mistakenly believe this is the job of a legal partnership, but with equity sharing, you don’t have to just have one “partner.” 

You’re also not confined to a single method. There are many ways to legally protect yourself while sharing the equity of a property with one or more people. We’ll get into some specifics, but for now, just understand that equity sharing does not preclude you from using land trusts, LLCs, or any other asset protection tools. While your arrangement may impact how to most effectively use asset protection or legal tools to protect the equity-shared asset, it doesn’t affect the options in your legal toolbox. 

What Options Exist for REIs Interested in Sharing Equity?

We promised there’s more than one way to share equity, and here’s where we deliver. These are our top three choices for protecting assets in equity-sharing arrangements. 

Option 1: Go the Joint Venture Route 

Using a Joint Venture for a new partnership isn’t just a smart move. JVs are also a great way to test-drive your new business relationship. See how you and your partner(s) handle challenges of the first asset in your equity-sharing arrangement while protecting yourself with a Joint Venture Agreement. 

You can choose to form a venture-specific LLC to further protect yourself, your asset, and your partners. Joint Venture-Specific LLCs can last for as long as you like, or for only the period the asset is under your control. You decide terms in the beginning, when you form the LLC’s Operating Agreement.

Option 2: Use Limited Liability Companies 

Owning a company with someone low-commitment. It’s not marriage: you get directions, a simple way to undo the arrangement, what’s allowed, what’s not, and literal rulebooks in the form of your Articles of Incorporation and Operating Agreement. You and your partner(s) may benefit tremendously from using an LLC to protect your equity-shared asset. 

A properly established LLC prevents either you or any individual from being directly associated with the asset. You may choose to use other tools to preserve anonymity on top of your LLC. If you already own an LLC that has never done business (AKA a “shelf” corporation) you might use that.

Note From Royal Legal Solutions’ Staff Legalese Translator:

Shelf companies are not the same thing as shell companies. That little “f” makes a huge difference. Shell companies control the operations side of businesses, normally preserving your anonymity. They’re never supposed to hold assets.

Shelf companies also don’t own or do much initially. Most REIs creating a shelf company form an LLC well in advance of needing it and don’t use it much or at all. After formation, the company stays “on the shelf” until a later date. Reasons investors form shelf companies include for their own eventual needs or to sell. Banks, lenders, and even partners are skeptical of “new” LLCs. But an LLC that has been “shelved” for years can be activated by simply performing a transaction. 

You can see why investors mix up these concepts. That Traditional LLCs are great entities for both shell and shelf companies doesn’t clear up any confusion.

Keep definitions straight by remembering what these entities do: a shell company hides your operations and identity from the world, just like a turtle’s shell. A shelf company, however, is one you make and stick “on the shelf” until someone needs it. Congratulations! You never have to get these ideas confused again. Back to your regularly scheduled investing content...

Option 3: Create a Private Arrangement Your Attorneys Can Agree On

Let’s say hate Options 1 and 2. That leaves literally every other legal structure and agreement, which trust us, includes many permutations of options. The quickest way for most investors to figure out their real preference is to get a trusted attorney’s opinion. If you and any partners do so, your interests may align. Your attorneys might independently give you the same thoughts, or some options and their benefits for your situation.

If you and your partners don’t wish to throw money at multiple separate lawyers (because honestly, who does?), you can always approach an impartial real estate lawyer together, tell them what you’d like to do, and ask their thoughts on the situation. Take notes! This doesn’t have to be the same lawyer who helps craft your solution. They’re just a qualified attorney you and your partners agree to trust to develop possibilities for your equity-shared asset protection strategy

After all, none of you want your property to get taken away by a lawsuit. Proactively defending your equity-shared asset can eliminate this terrifying, but all-too-common, possibility.

How Do Deeds and Titles Work For Equity-Shared Property?

A common question is who holds title to equity-shared properties. In the case of REIs conscious of asset protection, the question is what holds title (hint: sometimes it’s an anonymity-preserving entity/trust). Protected investors don’t like leaving their names on anything, especially titles and deeds. Deeds cause equal confusion, as the deed of an equity-shared property requires each owner to clarify their relationship to every other owner

But let’s suppose, just for example, that 14 investors enter into an equity sharing agreement. Which name would the title be under?

The real answer: it depends. On a few factors.

We’ve seen some beyond-sticky real deeds where, say, 12+ people want to share equity on a property and some are married couples. If each individual records their name, remember they will need to identify their spouse and also explain all other relationships to the remaining partners (however many there are). If you’re one of our 14 investors, you’ll ID your spouse if they’re involved, then explain the relationship you have to all other dozen investors.

Or, avoid this dilemma by controlling the entity without any partner directly owning it. All options above allow for this. LLCs, land trusts, and other legal options exist protecting equity shared properties. Number of partners won’t impact your level of asset protection, but can influence which option you want to use.

How to Open and Access an Offshore Investment Bank Account

We are always getting questions about off-shore accounts here at Royal Legal Solutions. Perhaps this is because off-shore accounts are one way many investors become acquainted with some principles of asset protection, even though the subject is also frequently misunderstood. Regardless, we thought it was high time to give you a straight-forward guide to how these accounts work, what you need to do to open one, and how to manage an off-shore bank account like a pro. 

Are There Special Requirements for Off-Shore Bank Accounts?

Depending on where you open your account, you may be required to provide additional documents to verify your identity or even previous bank statements to verify income. Basically, you’re dealing with a sovereign nation that has its own laws, each with advantages and drawbacks. Many of the nations with reputations for being tax havens have implemented their own legislation to prevent blatant abuse of their banking systems. Such laws are generally designed to prevent money laundering and should not pose major problems for investors. One thing to consider when deciding where to open your account is which taxes exist in the off-shore destination. Many popular choices have no inheritance or capital gains taxes, and that’s just scratching the surface of this issue.

You won’t need anything terribly unusual to open your account. It’s ultimately up to the destination bank and country, but most investors find proof of identity sufficient. Occasionally you may be asked to provide bank statements or income verification to comply with the aforementioned security laws. But some countries may not ask much of you at all.

Operating Your Off-Shore Bank Account

After you establish your handy off-shore account, there’s the matter of actually using it. You may notice you have the option to select your preferred currency, a luxury most Americans don’t have. Some investors take great care making this decision, as this detail can be leveraged for greater economic stability (particularly where an investor’s local currency is volatile) and other opportunities.

How to Make Off-Shore Bank Deposits

Deposits into your account are generally fairly straightforward. The international wire transfer is by far the most popular way to fund such an account. This method of electronic funding is available worldwide, and therefore useful in its ubiquity. Some fees may apply. The smartest way to make deposits will depend on a few local and bank-specific factors.

How to Make Off-Shore Bank Withdrawals

Making withdrawals from off-shore accounts can be done a number of ways depending on how the account is set up. Let’s not forget that these are still real banks. You usually can get an ordinary business checking or personal checking account, or event separate accounts with separate cards to be on the safe side. Check local laws (and perhaps even double-check with a local professional from outside the bank) to be sure you can make withdrawals in the amounts and with the frequency you expect to. Always know which way your money is flowing, and what it has “touched” in terms of your assets. Simple hands-on management of your own assets and balances can save you some major headaches down the road.

The Pros & Cons Of Equity Stripping

Equity stripping can be a critical component of your asset and creditor protection strategy. This tried-and-true tactic for making your valuables less attractive targets works by disguising the true value of the property in a controlled, legal manner. If you want to brush up on the topic, you’re in the right place. Learn more about the key pros and cons real estate investors need to know about equity stripping now.

Equity Stripping 101

You didn’t think we were going to give you advice without covering the basics first, did you? Of course not. Equity stripping is an umbrella term that describes any maneuver designed to remove the perceived value of an asset. In the real estate world, we usually do this through creative use of harmless debts or liens. The idea, in a nutshell, is to tie up the asset in so much financial or legal red tape that it is unattractive to both creditors and the folks who like filing lawsuits against us investors.

Equity Stripping For Real Estate Investors: The Pros

Equity stripping can be beneficial for several reasons, and is indeed a tried-and-true method of asset protection.. Here are some of our favorite things about this tactic:

These are just the very first of many benefits of equity stripping. But to be fair, let’s look at the downsides.

Equity Stripping for Real Estate Investors: The Cons

Rare is a good thing in life without a few drawbacks or trade-offs. Equity stripping is no different. Some of its significant possible drawbacks include:

Many of these “cons” can be addressed or avoided altogether with an appropriate asset protection strategy. For example, a professional can navigate the legal and financial implications of the smartest tactics for you.

Is Equity Stripping Right for You?

Maybe. It’s important to weigh the pros and cons before making moves, but many investors find that on balance equity stripping does them far more good than harm. Your chosen legal, tax, and financial professionals can best help you make the right decision. All you have to do is provide a clear picture of your motives and situation. Keep in mind that with all of the equity stripping tools available, equity stripping in general is likely to be helpful to you. Which specific methods will work best for you is the question to bring professionals in on.

Why Texas Is Great For Real Estate Investment Asset Protection

When you first begin learning about asset protection, it’s not unusual to experience a bit of decision fatigue. You’ll have many choices to make in the early days of creating your plan, which is one of many reasons why experienced legal counsel can make a meaningful difference in both the effectiveness of your strategy and the ease of implementing it. Of the many choices you will have to make is which state to form your asset protection entity in. We’ll dive deeper into why this decision matters so much in a moment. But essentially, you’re picking which state’s business, corporate, asset protection, and tax laws your company will have to conform to.

Smart investors can save hundreds or even thousands annually by choosing wisely, learning about their chosen structure, and following through with good business practices and compliance. While we strongly believe there are very few one-size-fits-all solutions in the law generally, our experience at Royal Legal Solutions has shown us that Texas is an extremely pro-business state with laws that are highly beneficial to the real estate investor willing to take advantage of them. And of course, we are all too happy to show you how, complete with examples. Why is Texas a great state for real estate asset protection, and what can its strong laws and structures do for your real estate assets? Let’s hit on the basics.

JURISDICTION MATTERS: LOCATION’S ROLE IN YOUR ASSET PROTECTION PLAN

Part of the reason we even get to have this discussion around Texas’s benefits from an asset protection standpoint is that they are technically available to each and every one of you. You see, when you construct an asset protection plan, one of the first things we do is establish an entity to limit your liability, sort your assets, and streamline your business. Many investors automatically assume that entities in their state will be the most beneficial to them, but this belief is rarely true in practice. In fact, you have the freedom to form a company in any state–regardless of whether you live there, own property there, or never even intend to visit.

What this means for the investor is actually something quite liberating. If you don’t like the laws in one state, you can change the playing field and the rulebook by moving to another. Find a state whose laws you and your attorney like a little better, or with financial or tax advantages that directly help you, and you’re free to form your business there. For this reason, anyone reading this article may decide that a Texas-based entity is more efficient for them. Let’s take a look at an example.

WHEN YOUR STATE ISN’T YOUR BEST CHOICE: A SERIES LLC EXAMPLE

Dawn is a multi-family investor who is fairly new to the real estate game. But she’s also a great student. Before she even bought her first property, Dawn had done a great deal of research, gotten herself a mentor, and sought the advice of several competent professionals. We encourage everyone to be like Dawn in these ways.

Dawn knew she was interested in buying three properties within her first year of investing. While she was learning everything she could about the basics of asset protection, she learned that the best asset protection plans isolate each asset into its own holding company (usually an LLC or Series). She set about looking at ways to do this and quickly realized she had two options:
Form a Traditional LLC for each property. This would mean she’d pay three filing fees and any annual fees thrice as well. And that’s assuming she stays at three properties!

Form a Series LLC, and place each property in its own Series. This option is cheaper, as Dawn would only pay one filing fee for the parent company, and adding Series is far easier than adding entire new entities. This option can easily be scaled up at no additional cost.

Dawn quickly settled on the Series LLC as her best option. She knew she wanted to own multiple assets, pass through her investment income onto her personal tax returns, and scale up indefinitely at no additional cost. She was correct that the Series LLC offers all of these benefits. Her first move was to look up a local attorney near her home in Hawaii.

A few minutes later, she learned that there was no Series LLC in Hawaii. Now, if you find yourself in a situation like Dawn’s, don’t stop here. Dawn didn’t. She decided to form a Series LLC in Texas, and is doing great with her diverse and growing real estate portfolio. All of her properties are in Hawaii. She found the structure affordable, got proper support in using it, and doesn’t see any reason to do things differently. After all, the Series LLC was Dawn’s first step towards becoming judgment-proof. She doesn’t have to worry about losing money to lawsuits. Instead, she focuses on growing her business.

Texas-based Limited Liability Company or Series LLC is still recognized in all 50 states. You can run your business from the privacy of your home with the help of an affordable registered agent or compliance service. Even if you opt to DIY or simply get help from an attorney with company creation, you will still get to enjoy the many benefits of operating in Texas.

Let’s do a brief rundown of costs for the most common types of companies, LLCs. In Texas, you’re not looking at much. These entities can value in the thousands for creation and maintenance if improperly established. But done right with professional help, here’s a rough estimate of what you’re looking at in terms of what you owe the state:

In other states, you may have to pay taxes. You might have to meet regulations like holding meetings and taking minutes. Your choices may be limited to Traditional LLCs only in your home state, as not every state offers every asset protection entity. When evaluating the differences between Texas and other states, be sure to do an actual side-by-side, checklist-style comparison. You’ll find across these criteria, Texas is very favorable to small business owners and real estate investors.

Texans are a rare and diverse breed, but most of us can agree we’d rather not pay additional taxes. At the state level, real estate investors aren’t charged any income tax. Consider that just one more cost that you can be spared by forming an entity in Texas. If you operate in California, you can look forward to the $800 Franchise Tax all companies must pay (with one critical exception: the Delaware Statutory Trust).

These fees and anxieties simply don’t apply in Texas. Enjoy keeping a little bit more of your money where it belongs: in your business.

CREDITOR PROTECTION ON TOP OF ASSET PROTECTION

The Lone Star State also offers many means of access to creditor protection. Texas’s legal protections for debtors are among the strongest in the country. The state’s debtor protection statutes provide legal protections for certain types of assets. Examples of these protections include the following:

The spirit of these laws is to allow people to live normal lives even if they find themselves in debt. The Legal Eagles out there may be interested to know most of these protections originate from the Texas Constitution. But they have been carried on and reinforced in the centuries since, meaning Texas has more property exemptions than most states.

If you’re eyeballing Texas for your company, our consult experienced asset protection attorneys before making major changes to your company or asset protection plan. While we think it is wonderful for real estate investors to educate themselves, ultimately, if you want these structures to give you the maximum amount of protection the law allows, you will need the help of legal experts. Bring your research and questions. We’re happy to guide you.

Recommended Reading

Understanding 1031 Exchanges and Asset Protection Entities

Anyone keeping up with real estate market trends or news will inevitably encounter mention of the 1031 exchange. The 1031 has even made its way into investment jargon, as if we need more confusion in that area.

Some people insist on using “1031” as a verb, as in when you overhear that investor at your MeetUp group asking his buddy: "Should I 1031 that property for the condo down the block?"

While we can’t condone the use of this verbiage, we can say the 1031 is useful. But it’s no wonder folks have questions. Today, we’re here to demystify the 1031, its uses, and how it works in the context of your asset protection plan.

What is a 1031 Exchange?

1031 Exchanges, so named for the IRS code portion that permits them, are a type of real estate “swap.” In a 1031 exchange, an investor can sell one investment property and use the proceeds to buy a similar property that is worth as much or more than the one being sold. By doing so, that investor gets temporary relief from capital gains taxes.

Ordinarily, capital gains taxes would be owed upon the sale of one property. But this cost can be a major expense, one that traditionally would come out of your budget for any potential “replacement” property. For this reason, investors opt to take advantage of the 1031 exchange when possible. Without capital gains taxes in the mix, the real estate investor can easily reinvest the full pre-tax value of the first property towards a second.

But of course, it is crucial that investors considering this move are clear about what they want out of it, and whether the terms of their deal meet the IRS’s criteria. Let’s take a closer look at what is required if you want to perform a 1031 exchange transaction.

1031 Exchange Rules

For a proper 1031 exchange to take place, the following three circumstances must be present:

If the deal does not meet these terms, it won’t be possible to reap the full tax benefits of a 1031 deal. There are cases where investors who meet all but the third criterion execute “partial 1031 exchanges” on properties of lesser value, but in doing so, they forfeit the full tax protections of an ordinary 1031 exchange. Finally, keep in mind that these are not all of the requirements but simply the basics. For more information, see our article: Is a 1031 Exchange Investment Strategy Right For Me?

Plan Ahead For Successful 1031 Exchanges With Asset Protection Entities

Using legal tools like the Anonymous Land Trust, LLC, or Series LLC is great for your asset protection plan, but may pose potential issues during a 1031 exchange. We find these situations are best avoided through simple proactivity. The further ahead you can anticipate your desire to do this kind of real estate deal, the better. Let’s take a closer look at some possible problems, and why planning ahead helps.

Entity Issues: LLCs and 1031 Exchanges

The good students of the Royal Legal School of Asset Protection all know what we tell people about keeping property in your own name: just say no. Entities controlled by the investor are far preferable for several reasons. You might need one to begin with for simply conducting business. But they also make suing you personally for any liabilities relating to your investment property a chore for would-be litigants.

The Internal Revenue Code specifies that the property you take in a 1031 exchange must be titled in the same name as the property you give up. For those who purchased property in their own name for financing, then transferred it into an LLC or other structure, the titling requirement can pose issues. But if you, say, sell a property from an LLC but later learn you would need to acquire the second property in your personal name, you would be in violation of this requirement. Your exchange would become void.

Planning ahead is helpful because you can simply transfer the first property into your own name before making the sale. This will be helpful if you need financing again, and most owners of residential real estate will find that there is not an affordable and practical way to make this exchange directly to and from an LLC, even when there isn’t a particularly strong need for financing.

Properties Owned By Multiple People Through Partnerships

Issues with 1031 swaps can also come up when the initial property is owned by multiple people through a Limited Partnership. Again, in this situation, the problem is about titling. However the sold property is titled is also going to need to be the way you buy the next one.  Most of the time, the same “cure” can be used as for the first problem: plan in advance regarding titling.

Sometimes, you may want to execute a 1031, but your partner wants to cash out. Investors in this position can execute a move called a “drop and swap.” Essentially, you would be bowing out of the partnership as it is currently structured. With the help of a qualified real estate attorney, you can deed property out of the partnership and into the names of each individual involved. Your legal relationship to your former partners can become one of tenants-in-common, which allows each person to decide whether to reinvest in the exchange or drop out.

Anonymity on the Internet: Why Asset Protection Requires Online Privacy

Maintaining your anonymity can be harder than ever in the digital era. Anybody who can type can search for—and find—an astonishing amount of your personal information. Your name, insurance policies, companies you have an ownership interest in, and especially properties you own are all potentially compromising details that you likely don’t want spread far and wide.  

We also know that anonymity on the Internet is crucial to effective asset protection. So what’s the investor with an online presence to do? 

Your Personal Information Is Most Likely on The Internet

The simple reality is that unless you’ve taken measures to protect your personal information, it is likely somewhere online. Without taking precautions to preserve your anonymity, many of your personal details which you might consider private can end up on the public record. Anything on the public record can be easily located with a Google search. There’s no need for sophisticated skill sets or deep knowledge on the other party’s part.

Why is this a problem for real estate investors in particular? Frankly, we have more to lose from too much public information.

Of course, the simplicity of locating public records is one of the main reasons we encourage investors like you to never own property in your own name. This is just one of many steps you can take to secure your anonymity, and it is basic yet incredibly important.  When you own property in your own name, simply looking up the address leads straight to you, and by extension, everything you own. This is the most vulnerable position you and the asset can be in. Asset protection is largely about moving those easily seized assets out of your name and into a more secure structure under your control.

You might recall that investors can only lose money in two ways: bad deals and lawsuits. Anonymity helps address the threat of lawsuits. After all, for another person to successfully sue you, they will need to know who exactly you are. They will also need to prove your connection to the property or entity owning the property, a problem savvy attorneys can anticipate and prevent. Put simply, our job as asset protection attorneys is to complicate potential lawsuits as much as possible before they ever materialize. Anonymity helps stop lawsuits by complicating the initial research phase conducted by opposing lawyers to see if suing you is worth the trouble.

That said, you can undermine your own asset protection plan if you aren’t thoughtful about protecting your own privacy. The point is, the less information about you that is freely available online, the better.

Online Best Practices To Ensure Anonymity

Some common-sense techniques paired with simple awareness of the value of your anonymity can help you eliminate potential problems as you navigate an increasingly digital world.

Avoid Openly Discussing Investments or Finances

You’ll also want to steer clear of any behavior flaunting wealth. If you have it, that’s wonderful. But in order to keep it, it should stay your business. You can absolutely enjoy the luxuries of wealth, but you don’t need to Instagram your vintage Moet Chandon or post photos of your exotic car collection to Facebook. Instead, play it cool. Be mindful that the internet really is a public space.

Of course, it may be unavoidable for people to know that you are an investor. They do not, however, need to know the particulars of where you invest and what you own.

Be Wary of Info Scammers

Sadly, the web is crawling with scammers of all sorts. They come in the form of Facebook Marketplace ads that are a little too good to be true, leading you to a “third-party” registration that looks legitimate, but exists just to capture your information. They can also appear as friends of friends, love interests, wealthy relatives hoping to reconnect, and even as potential investing partners. Even if you realize you’re being scammed, some cons are so finessed that you won’t realize anything’s up until you get an obvious red flag.

Here are some quick and dirty tips that can help you avoid falling prey to scams that could compromise your anonymity on the Internet:

Bottom line: scams and breaches are best avoided by being tight with your security and smart.

Legal Solutions for Real Estate Investors Who Want Anonymity

There are also legal tools you can use to preserve your anonymity and limit the amount of personal information about you online. At the very least, you can obscure any connection between such information and your business and assets. Not everything can be “undone” online, and absolute anonymity is nearly impossible. What legal tools can provide you with is layers of protection that will make penetrating your anonymity, and therefore connecting you to your valuable assets and suing you for them, far more difficult.

Asset Protection: The Frequently Asked Questions

There’s always something new that investors can learn about defending themselves with the tools and strategies of asset protection. We also understand though, that this area of law is less commonly understood. Heck, there are even solid business attorneys even who know about asset protection tools but still have fundamental misunderstandings about actually practicing this legal art. In the interest of clearing away some of the mystique that surrounds our growing field, we wanted to begin answering some of the most common questions that we get from our real-life clients. Let us know in the comments section if you learned something new today, or what FAQ you think needs to be on our next list.

Which Asset Protection Tools are Right for Me?

Woah, we’re just getting to know each other. In all seriousness, we can’t tell you what’s best for you without knowing more about you, your goals, and of course, your business and major plans.

In fact, if anyone tells you they can divine the ideal tool set for you without knowing much or anything about you, your B.S. Detector should ding. There is no one-size-fits-all asset protection solution, and in fact, our circumstances are all so vastly different that there can’t be.

There are, however, some common basics. Most of us in the real estate world will need an entity as the foundation of our asset protection system. Limited Liability Companies are great choices, as they offer an easy way to both organize your business and have inbuilt mechanisms that prevent lawsuits. Your entity can also be used alongside anonymity tools like land trusts, and other legal work including strong contracts.

Full service firms like ours can even use retirement and estate planning tools to strengthen your asset protection plan. If you really want to learn about the best tools for you,  schedule a consultation with an asset protection expert.

The Entity I Want Isn’t in My State! What Can I Do?

Since the Traditional LLC is in all 50 states, we’re guessing you might be talking about our good friend, the Series LLC. This entity is indeed great for investors in most states, yet it isn’t offered in every state. Daily, we get emails and social media messages from investors scattered across the country lamenting that their state doesn’t have a Series LLC option.

It’s okay if your state hasn’t yet been hit by the Clue Train. You can always form a Series LLC in another state. For instance, many Royal Legal Solutions clients use Texas Series LLCs but haven’t even been to, let alone owned property, in Texas. Some leverage our presence here, cost-reducing flat fee offerings, and ability to serve as the Registered Agent for more effective Series LLCs than their home-state would ever offer.

Isn’t The Series LLC Structure Too New to Rely On?

We get this question and variations all the time. Perhaps a little history lesson will help. The first Series LLC was born in Delaware back in 1996--over 20 years ago. Let’s compare that to the Traditional LLC, which Wyoming pioneered not even 20 years earlier in 1977. Not so new after all, right?

So, the reality is that the Traditional LLC, so often hailed as long-established institution,  isn’t much older than the Series LLC. It’s not a huge departure legally speaking either, but simply an offering with more nuance and possible uses for the savvy investor to exploit.

Some criticize the Series LLC as “untested,” but this is also untrue. It’s simply harder to document the structure’s “wins” because of its defensive nature. You can see plenty of Traditional LLC court cases where the structure was “tested”--and lost. The absence of a reliable way for attorneys to pierce the properly-established (S)LLC structure is a huge point in its favor. It’s hard to count how many lawsuits didn’t happen. But this structure effectively stops them before filing.

Is Using Trusts to Disguise Company or Property Ownership Legal and Ethical?

If you’re using Anonymous Land Trusts correctly, meaning under an experienced attorney’s guidance, there’s nothing illegal about using them for asset protection purposes.

For the ethically concerned, consider that you are using tools that anyone can. Anyone with a wifi connection can read this article and others like it to learn about the power of trusts. So, you’re not getting an unfair edge. In fact, these tools were once so cost-prohibitive that only the exquisitely rich could use them. Why shouldn’t you? But some investors also mistakenly believe, or at least fear, that anonymity is only necessary for those with something to hide. Well, that’s just plain false.

Thinking privacy is just a shield for wrong-doing is a huge mistake. You want your privacy as a real estate investor, above all else, to protect yourself. The more difficult you are to connect to your valuable assets, the more difficult you are to sue: end of story.

Further, asset protection tools aren’t designed to help someone who’s up to no good or breaking the law. Your lawyer actually can’t help you break the law on purpose. These tools are all about preserving the wealth you’ve already built.

What Should I Look For in an Asset Protection Attorney?

Specific, tangible asset protection experience. Those like us at Royal Legal Solutions who are investors ourselves will also bring that experience to you. You can verify your attorney’s credentials with their state Bar, and your attorney ca