The Fair Housing Act's Protected Classes: What Landlords Need to Know

Over several years of helping landlords fight and win cases, we’ve noticed that the term “protected classes” leads to a lot of confusion. In this educational guide, we’ll discuss what all landlords need to know about the Fair Housing Act’s protected classes. We’ll clarify what each protected class means and examples of potential discriminatory actions against each class. In addition, we’ll discuss what is NOT a protected class under the Fair Housing Act. Before we get into those details, let’s first review the history of protected classes under the Fair Housing Act.

History of Protected Classes

Protected classes are those groups of citizens who are protected against discrimination due to their membership in one of the following classes:

  1. Race
  2. Religion
  3. Color
  4. Nation of Origin
  5. Sex
  6. Familial Status
  7. Disability

Before these protected classes were established, the general concern over housing discrimination came to light around 1966. At this time, war veterans noticed that those of color were being discriminated against when seeking housing in certain neighborhoods. This led to public marches for housing rights. These marches revealed that the Civil Rights Act of 1968 wasn’t extending to housing rights. In 1959, the California Fair Employment and Housing Act set precedent for the protected classes later found in the Fair Housing Act. The Fair Housing Amendments Act was signed on September 13, 1988. It added the last two protected classes, familial status and disability to the Fair Housing Act.

Race, Color and Nation of Origin in Housing Discrimination

Landlords may agree that discrimination towards these protected classes may not be as blatant as they were prior to or in the earlier days of the Fair Housing Act’s enactment. However, they do still exist in subtle forms. Landlord should know the difference between these protected classes and ensure that their tenant selection process and overall housing policies don’t discriminate based on membership in any of these three classes. Race refers to being White, Black, Asian, Pacific Islander, etc. It’s important to note that racial discrimination includes discrimination for perceived race or being biracial. The question “what are you?” can be a sign of racial discrimination. Also, racial discrimination can occur because of association with particular races.
 
For instance, a landlord who is hostile to a tenant’s black in-laws and prohibits them from visiting the property due to their appearance, can be accused of discrimination. Meanwhile, color discrimination is discrimination based on the lightness or darkness of an individual’s skin. For instance, renting out apartments to lighter skinned African Americans but not darker skinned African Americans is a specific form of color discrimination. Lastly, discrimination based on nation of origin means discrimination based on not only where you are from, but where your family is from and your language or customs. For instance, creating more favorable rental terms for native English speakers is an obvious case of discrimination. Refusing to rent out property to those who cook a specific customary cuisine can also lead to complaints, even if the reasoning is rooted in practical concerns over food odors.

Disability and Familial Status in Housing Discrimination

These two protected classes are more commonly discriminated against today. In fact, a 2015 study by the National Fair Housing Alliance found that discrimination due to disability made up more than half of all housing discrimination complaints filed with the Housing and Urban Development Department. Discrimination based on familial status made up around 10 percent of annual complaints. A common example of discrimination based on disability is when a landlord refuses to allow a tenant to modify their bathroom to include railings.
 
This example is more obvert, but also note that discrimination based on mental disability can be grounds for a complaint. Meanwhile, the familial status protected class was included in the Fair Housing Act as a means of protecting families with children under 18. Like in the case of other protected classes, landlords should be aware of both obvious and more subtle forms of discrimination based on familial status. For instance, denying a rental property to a tenant who otherwise qualifies for a unit because he/she has a toddler child is an obvious discrimination. However, cases have existed where landlords group families with small children into less desirable back of the lot properties. While this may be a defensive move to counter noise complaints, it unfairly restricts access to units that are otherwise available to other families.

What is Not Protected Under the Fair Housing Act?

In order to avoid unnecessarily accommodating some groups of people, landlords should also be aware of what is not considered a protected class. This can help prevent accommodating groups that may end up hurting your rental business. One group that is not protected under the Fair Housing Act is renters who participate in illegal drug activity. Current illegal drug use is not protected, although recovering addicts are considered a protected class since the addiction can be considered a disability. As you can imagine, this can be a complex exemption to interpret from case to case. If you’re a landlord dealing with a drug use case, don’t let your biases drive your decisions.
 
Our legal experts can provide sound advice based on current federal and state housing laws. In addition, the Fair Housing Act doesn’t consider source of income to be a protected class. Thus, in some cases a landlord can reject a potential tenant who wants to use housing choice vouchers. Although source of income isn’t a protected class in the Fair Housing Act, some states and counties do consider it a protected class. Landlords should be aware of not only the Fair Housing Act’s protected classes, but also any additional anti-discrimination policies enacted by their state and county.

Get an Asset Protection Lawyer

As you can see, knowing what is and what is not protected under the Fair Housing Act is critical in both protecting against housing discrimination complaints and protecting your business interest as a landlord. Understanding the more common complaints based on disability and familial status is especially important. However, as we’ve mentioned before even the most careful, well-meaning landlords can face lawsuits. This is why having a good asset protection lawyer is critical. Contact our experienced legal professionals today.

HUD Guidance Memo on Landlords’ Use of Arrest and Conviction Records

Do you use arrest and conviction records to assess potential tenants before allowing them to rent your property? You might want to read this as a misstep can destroy your business and your life.
The use of criminal history to assess existing and prospective tenants was delved into by a guidance memo published on April 3, 2016 by the Department of Housing and Urban Development (HUD). While such a memo doesn’t have any legal bearing in a court of law, it does hold sway with judges. The contents of the memo mirror those of the Enforcement Guidance memo published by the Equal Employment and Opportunity Commission so it didn’t catch those in the legal fraternity by surprise.
Here’s what you need to know regarding your dealings with your tenants on this issue.

Tenant Applicants with a Criminal Record

Tenants and rental applicants who have a criminal record have not hitherto received protection from housing discrimination. The HUD memo highlighted the fact that federal fair housing laws only protect individuals from discrimination based on color, race, familial status, religion, national origin, disability, and sex. Those with criminal records are exempted from this privilege.
The implication of this under federal law is that landlords had the freedom to adopt policies targeting those with a criminal history. For example, a rental applicant who had been convicted or arrested would be given no chance. Noteworthy is that some local laws such as those of San Francisco (the 2014 “Ban the Box” ordinance) prohibits questions about arrests on housing applications for homes that are  subsidized by the city.
Only people with a drug use conviction are exempted from this practice. The overriding theory for this is that drug users are actually dealing with a disability. This is a protected class as previously indicated. Drug dealers, on the other hand, do not enjoy this privilege. Fair housing lawyers have been trying to nullify landlord policies that reject tenant applicants with an arrest or conviction record for a while now. The inherent challenge has been how to do it given that these people don’t have the “protected class” status.  
In 2015 a U.S. supreme Court case held that housing discrimination was demonstrable where the landlord had clear bias against one group and where the landlord had a policy that seemed neutral at face value but had the effect of discriminating against a protected class.
A good example of real-world intentional discrimination is where a landlord’s policy states that

“I don’t rent to Blacks/Asians/women/gays, etc.”

Indirect discrimination or disparate impact is where the policy states

“I don’t rent to groups of people living in [an area where the majority of the population are a racial minority].”

It’s easy for the rejected applicant to prove discrimination in the first example by using the landlord’s stated policy as evidence. For the second example, the rejected applicant would be required to prove that the policy was discriminatory due to the large number of people belonging to a racial minority living in that area.

Disparate Impact and Arrest and Conviction Records

The memo captured this new way of proving discrimination. It is hinged on pointing out statistics that show that exceedingly more Hispanics and Blacks are arrested and/or convicted than their White counterparts. As a result, when a landlord includes the no arrest or conviction rule in their policy, these class of people are harmed disproportionately compared to Whites. While such a policy may seem neutral, it is actually a discriminatory policy against protected individuals.

Arrest-Without-Conviction

The memo did not touch on the issue of turning away rental applicants and tenants who have relevant convictions. However, it did disagree with the rejection of applicants based on arrests without convictions. According to the memo this is inappropriate because an arrest simply shows that someone was suspected of an offense. While it’s required of the landlord to keep guests, residents, employees, and repair persons safe from would-be troublemakers, it would be a disservice to reject an applicant based on an arrest. An arrest is not a justifiable reason for rejection and is therefore not relevant during the screening process.

Conviction

With convictions, landlords are allowed more leeway. Some convictions are indeed relevant to the landlord’s obligation to protect residents and other people in his property. For example, if the applicant has been recently convicted of assaulting a neighbor, the landlord has a justifiable cause to deny them tenancy. The same goes for a person who has a domestic violence conviction.
However, if the conviction is a few decades old then there is no valid reason to deny the applicant tenancy as chances are very slim that they will cause problems in future. The HUD memo goes further to suggest that landlords consider factors such as the age and nature of conviction before denying housing to an applicant. What was the applicant convicted for? How long ago was it? What circumstances surrounded the conviction? Have they been reformed and crime-free since the conviction? These are some of the questions landlords should ask before making a decision.
This would require a case-by-case evaluation of applicants. This is a job many landlords would loathe to do since they don’t have clear guidelines on how to go about it. On the other hand, landlords would have to make some judgment calls during the evaluation. For example, they would have to decide how old is old enough with regard to a conviction and hope that their decision stands in court if it is challenged.

White Applicants with Criminal Records

So, what is the effect of the HUD guidance on Whites with a criminal record? The memo seems to suggest that only Hispanics and Blacks can raise a discrimination claim as they are unduly disadvantaged by policies denying tenancy to those with criminal records. The implication of this is that a White applicant cannot argue that their race has been targeted disproportionately if they are denied tenancy as a result of an arrest record.
Does this mean that a landlord should only apply the no-arrest policy to applicants that are White? The memo does not delve into this issue, but we can always come up with a common-sense answer. For one, it is a recipe for trouble and confusion since you can’t tell landlords to discriminate applicants based on their race where different rules apply to different groups of people. As a rule, if a practice (rejection of arrest-only applicants) is unfair and consequently illegal for one group of people, it should be illegal to everyone.
Secondly, the United States Supreme Court has always been willing to extend the benefits of a rule that in a way affected one group of tenants to another group of tenants. For example, White tenant applicant challenged a prospective landlord’s practice of denying blacks tenancy. The grounds for the challenge were that the policy denied the White applicant the benefit of living in a racially-integrated community. They went further to note that the person blacklisted was not the only victim of the discriminatory housing practice. The high court agreed with the White plaintiff’s argument and the case was given the green light to proceed to trial.
Given the expansive provisions on who can challenge discriminatory practices by a landlord, it is clear as day and very likely that White applicants will find a way to benefit from the HUD memo.

Does The Federal Fair Housing Act Apply To Your Rental Property?

You have a lot of leeway when it comes to screening potential tenants for your property. You can deny tenancy to an applicant based on their credit score, financial ability, renting history, and criminal history. However, it’s not an anything-goes affair.  The U.S. federal government does impose some limitations. There are some personal characteristics of the applicant that must not be a consideration during the screening process. Failure to follow the guidelines stipulated by the federal government can get you into trouble.

The Fair Housing Act (FHA) is the primary law that protects the rights of tenants across the U.S. Since it’s a federal law, it applies in all 50 states, Puerto Rico, and the District of Columbia. Under the FHA jurisdiction, the law applies to almost all housing situations. You should pay attention to the FHA because there is a high chance it applies to your rentals.

Below we go over some of the areas where the FHA applies. This will help determine whether it applies to any of your properties.  Or better yet, talk to one of our qualified attorneys to help you along.

When Does the FHA Apply?

Small Buildings Occupied by Owner
If a building has less than five apartments and the owner occupies one of them, then it’s unlikely that the FHA is applicable to your property.

Single-Family Homes
If you have a single-family home rented out or sold without a broker, then the FHA is unlikely to apply to your property.

Religious Organizations
If you’re operating under a religious organization and have rental property that you’re operating for non-commercial purposes, then you can limit occupancy or give preference to people of your religion without any legal ramifications. However, this is only limited to religion according to the FHA. The religious organization is still not allowed to discriminate based on color, race, or national origin.

Private Clubs
Do you run a private club that owns apartments? If the apartments are not meant for commercial purposes, then the FHA allows you to limit occupancy and give club members preference over other people.

Senior Housing
FHA (42 U.S. Code § § 3601-3619 and 3631) helps protect tenants from being discriminated against based on several protected classes that include familial status. This means that you cannot decide to reject applicants who have kids. “Familial status” refers to a household with at least one child under the age of eighteen. However, this provision may not apply to you if your property is classified as senior housing. Exempt properties fall under the FHA rules of 55 and older or 62 and older communities. Properties that participate in local, state, or federal housing programs are also exempt from the provisions.

Other Considerations

Local Fair Housing Laws

Whether or not your property is subject to the provisions of the FHA, you still need to go a step further and find out if there are any state, city, county, and town fair housing laws. You may be surprised to discover that there are other local laws you might need to adhere to. These laws may cover more situations and stipulate rules for a wider array of properties than the FHA does.
For example, the FHA usually does not apply when the property is owner-occupied and has less than five apartments. However, the fair housing laws in Massachusetts provide for owner-occupied properties with less than three apartments (Mass. Gen. Laws ch. 151B, § 11).

Profits

Adopting fair housing laws could have economic benefits to landlords. Even if your property is exempt from fair housing discrimination provisions, you could still opt to comply with the rules. Apart from the fact that you’ll be fair to the tenants, FHA advocates argue that there is an economic benefit to following the provisions of this law. By being an inclusive landlord, you stand a better chance of growing your bottom line.

Reputation

As a landlord, you should always try to be fair to your tenants as it could affect your reputation. FHA rules ensure that your tenant screening policies and any other rules you might have are fair and legal.  

Royal Legal Solutions Can Help

The bottom line is that you can be sued for plenty of reasons. While you can always play safe and treat your tenants fairly, there’s a chance you might still end up in court for alleged discrimination by a tenant. Should a judgment be made against you, then you will be in for it. You could easily lose your property and livelihood. You don’t want to be caught unaware by a discrimination suit. We’ll help you comply with the FHA and structure your business the right way to protect your assets. 

What Is The Liability of a Land Trust Trustee?

A land trust is a type of revocable living trust. Unlike a living trust, which can contain any types of assets, a land trust is for real estate or real estate-related items only.

With a land trust, you are able to obscure your overall net worth. This is because the property contained within a land trust is not listed under your name in public records. In fact, the property is listed in the name of the trust on all public records.

Below, we discuss what (if any) liability a land trust trustee has.

Land Trust: The Basics

As stated above, a land trust is a type of living trust. As with other types of trusts, a land trust must have a designated trustee. 

In a land trust, a trust agreement will act as the vehicle through which you dictate the trust arrangement. For most land trusts, the trustee holds the legal title to a property. However, all rights remain with the beneficiary. (In a land trust, you are typically the beneficiary.) This means the beneficiary retains all rights to the ownership, possession and management of the property. In other words, the beneficiary retains the right to manage, rent or sell any property contained within a land trust.

Finding a trustee for a land trust can be hard. While companies like Royal Legal Solutions offer “nominee trustee” services, finding an individual interested in taking on this task is often difficult.

Benefits of a Land Trust

Before we talk about the role and liability of a trustee, let us review the benefits of a land trust. While there are many benefits to having a land trust, the primary reasons are related to anonymity and control.

Anonymity

In a land trust, the property is listed under the name of the trust. This means your personal identification, including name and address, are not listed in public records. In today’s world, anonymity is a rare and precious protection measure. Why? When your property is not linked to you, it helps to obscure your overall worth. In doing so, it can help reduce potential lawsuits. (After all, if your net worth is unknown, lawyers cannot seek exuberant restitutions.)

Obscuring your net worth can also help with property negotiations. Why? Because when your personal wealth is unknown, the party you negotiate does not realize your full worth. This can reduce the likelihood that they press for ridiculous amounts of money simply because they know you can afford it. (Celebrities tend to purchase properties through land trusts for this reason!)

Control

A land trust gives you full control over the management, rental or sale decisions of your property. You also do not have to go through a probate court before distributing or selling properties under a land trust. Because they are considered personal property, assets in a land trust are exempt from court proceedings that regulate their distribution. This level of control is greatly appreciated by many parties. (In an irrevocable living trust, for example, you can not freely amend the trust or change beneficiaries.)

Liability of the Land Trust Trustee

In a land trust, the trustee is only to act in accordance with directions given from the beneficiary. While the beneficiary has a keen interest in the trust agreement, a trustee should as well. Why? To avoid liability, a trustee will want the trust agreement to specifically exempt them.

In fact, a trustee should be exempt from personal liabilities related to the land trust’s debts and obligations. (Some trust agreements divide incidents of ownership between the trustee and beneficiary.

Make sure you read any trust agreement before signing it to ensure it includes the points each party find relevant.) In addition to this, the trustee may find themselves personally liable, regardless of the trust agreement exemptions, if they have acted negligently. They may also be liable if they acted without the direction of the beneficiary.

Certain states have additional statutes that apply to land trusts. Your trustee should research these laws to ensure their liability is well known prior to signing any agreements.

Royal Legal Solutions

At Royal Legal Solutions, we understand the nuances of the role of a land trust trustee. We work with you to carefully construct a trust agreement that benefits everyone. As your “nominee trustee,” Royal Legal Solutions files the right paperwork on behalf of your land trust. Our name appears on all public records related to your property to protect your anonymity. After filing the right paperwork, we transfer the trustee title back to you.

With your net worth remaining anonymous, you assume all rights and responsibilities associated with both the trustee and beneficiary role. Think this offer applies only to individuals in a certain state? Not true. Royal Legal Solutions are able to assist with land trusts throughout the United States and Canada. If you would like to schedule a consultation with us, please contact the professionals at Royal Legal Solutions today.

Land Trusts and Limited Liability Companies

If you want to protect your privacy and real estate assets, a land trust is a great way to do so. Why? A land trust inherently provides anonymity on public records related to the ownership of a property. For those investors looking for increased protections, however, a limited liability company (LLC) can help.

Understanding the Benefits of an LLC

As the name implies, a LLC limits your personal liability. Legally, your LLC is responsible for its own debt and obligations. As such, your personal finances and assets are not subjected to any court judgments or legal proceedings against your LLC. If you fail to pay mortgage on a home purchased through your LLC, only the LLC itself is responsible for repaying this debt. LLCs are also exempt from having to hold annual meetings or filing extensive records or reports. The Internal Revenue Service (IRS) classifies LLCs as proprietorships or partnerships. As such, an LLC is able to take advantage of tax breaks associated with them. For example, an LLC does not pay taxes on any gains. Instead, it is used as a pass through vehicle and taxes are paid through the owner’s personal tax returns instead.

How Land Trusts And Limited Liability Benefit You

A land trust provides property owners with complete anonymity. This is a crucial feature that can obscure your net worth and limit potential lawsuits. This is because, with a land trust, the property’s owner is listed as the name of the trust itself. Your personal information is not associated with any public records related to ownership of your property. As the beneficiary, you also retain full control of your property. You can manage it as you wish, rent it to others, or even sell it whenever you want. This is a great way to protect your asset and you from potential money sharks looking to make a quick buck off someone they believe has a high net worth.

The Best of Both Worlds

When you combine land trusts with LLCs, you get the best of both worlds. How? Let us take a look at some of the most frequently asked questions regarding land trusts and LLCs.

A Note on Series LLCs and Land Trusts

When you establish a LLC, you should consider forming a series LLC. Why? A series LLC segregates assets. Each asset under the various “series” are protected from lawsuits or judgements that may be made against one and other. In other words, if you establish a series LLC, each with its own land trust, the properties under Series LLC A, B and C are exempt from judgments against Series LLC D. This protective barrier between LLCs and assets is a great way to further protect your investments, while maintaining your anonymity.

Royal Legal Solutions: A Knowledgeable Trustee

In a land trust, you designate a trustee. This is true even if you establish a land trust in support of an investment made through your LLC. At Royal Legal Solutions, our professionals have experience with both land trusts and LLCs. Our experts are fully aware of the best ways to protect your assets and can advise you based on experience, a thorough understanding of state and federal laws, as well as our professional insights into the benefits of the land trust. In fact, Royal Legal Solutions is able to assist you with establishing your land trust and your LLC. We also have experience with assisting clients all over the United States, as well in Canada. If you are interested in scheduling a consultation with Royal Legal Solutions, please contact us today.

Land Trust Beneficiary: What Does IRS IRC Section 121 Advise?

A land trust is a great way to own property while maintaining your anonymity. With a land trust, the ownership of the property is publicly listed under the name of the trust itself. A land trust has a designated trustee as well as at least one beneficiary.

With most land trusts, the property owner is the beneficiary. This allows them to maintain full control over the property. However, limited liability companies (LLCs), corporations, the trustee, and other trusts can also be listed as the beneficiary. In listing one of these other types of parties as the beneficiary, you increase your anonymity.

To determine whom you should have listed as the beneficiary, you might want to consider the tax implications.

IRC Section 121

The Internal Revenue Service (IRS) establishes regulations regarding taxes. These regulations, known as the Internal Revenue Code (IRC), apply to almost every financial situation in America. A review of IRC Section 121 makes it ideal for the property owner to list himself or herself as the beneficiary of a land trust. Why? Let us examine the code for a better understanding.

The Issue with Entities

A grantor trust, as defined by IRC 671-679, is considered a qualifying trust that can act as a beneficiary of a land trust. A revocable living trust is a qualifying trust as well. If you make an entity your beneficiary instead, you will likely have an issue qualifying under the IRC Section 121. (However, recent court rulings have begun to show promise relating to LLCs and asset protections.)

Let Royal Legal Solutions Help

At Royal Legal Solutions, we understand the intricacies of tax regulations. Our professionals have experience with all aspects of asset protection. This includes the establishment of trusts, LLCs, and other entities. Our experts are licensed to work throughout the United States as well as in Canada.

If you still have questions about IRC Section 121, feel free to ask in the comments section below. If you need specific advice, set up a consultation with Royal Legal Solutions today. Asset protection is not a do-it-yourself gig.

My name is Scott Smith. In addition to being an attorney, I’m a real estate investor myself. If you’re considering a land trust, let us help you protect your valuable investments with a foolproof asset protection strategy from people who’ve been around and seen it all. Take our financial freedom quiz and schedule a free consultation. We’ll help you make your investments bulletproof.

Dealing With Tenants Who Have an Addiction to Drugs or Alcohol

With the sheer prevalence of substance use disorders and addiction in the United States, most real estate investors will have to confront the issue of a tenant suffering from the disease of addiction at some point. The Centers for Disease Control estimate that one out of every eight of American adults are currently struggling with alcoholism, and an additional one out of ten are addicted to narcotics. Our nation is also in the midst of an increasingly fatal opioid drug crisis that has claimed thousands of lives. So, what can a landlord do when confronted with evidence of a tenant's addiction? This article will explore the rights of addicted tenants and discuss some of the basic strategies for managing such tenants.

How Your Tenant's Addiction Can Affect You

Many landlords simply do not want to deal with a tenant in active addiction. Some of these concerns are based on stigma or stereotypes about people who use drugs and alcohol. Others are more practical. It is often true that a person struggling with substance abuse is unreliable. Addiction leaks into every facet of a person's life as the disease progresses. Problems with daily tasks and finances are extremely common among alcoholics and addicts. As a person's addiction grows more severe, they are more likely to make a mess of your property, neglect their financial obligations to you, fail to report problems with the property, and even become hostile or belligerent in their communications with you.

So many landlords don't want a substance-abusing tenant in the first place. However, there are laws that protect your addicted tenant's right to housing. Knowing these laws is vital to handling your business relationship with the tenant in a fair and legal way.

Can You Evict a Tenant Over Their Addiction?

Upon discovering that a tenant is an alcoholic or addict, many landlords want to evict the person immediately to avoid some of the consequences discussed above. However, addiction is a recognized disability under the Fair Housing Act. This federal law was designed to ensure that people with disabilities are not discriminated against. While discrimination certainly still occurs, engaging in discrimination as a landlord could land you in court. Even restricting access to your home based on suspicion that your tenant has a current or former addiction could expose you to liability.

Without fair housing laws, people with mental and physical disabilities would not be able to access housing. So, what can you do in the case of addiction, as it is considered a disability?

Do Discrimination Laws Mean I Have to Put Up With Bad Tenant Behavior?

Discrimination laws are designed to protect groups of people, not their behaviors. A simple analogy might be to consider a tenant who is blind. You cannot evict the tenant for their blindness, but if that same blind tenant happens to be bashing holes in your wall with a sledgehammer or otherwise violating their lease, you can indeed evict them based on the behavior.

Behaviors that are against the law are not protected by discrimination laws. For instance, a person who is using and dealing cocaine in your home is committing multiple crimes. If the person is using a substance illegally, that's a whole different ball of wax than a person whose drinking habits or legal prescription drug use you might not personally approve of.

What to Do if You Suspect Your Tenant Is Abusing Drugs or Alcohol

These six practical tips can help you navigate your relationship with an addicted tenant.

1. Understand the Difference Between Active and Former Addiction.

Landlords should be aware of addiction recovery. People recover from alcoholism and addiction often, meaning they no longer use drugs or alcohol. People in recovery often make great tenants, as they have addressed their problems. Understanding this distinction will help you, but the remainder of this article will discuss active users.

2. Screen All Applicants Fairly.

Treat all applicants equally to avoid discrimination accusations. If you're concerned about drug and alcohol use, ask all applicants the same questions. The little old lady with blue hair and the 20-something in a sketchy trench coat with circles under his eyes should get identical screening processes.

3. Be Aware of Your Own Biases.

Stigma against addiction alone is not a reason to take action against a tenant. Everyone has biases of some sort, particularly with how common these problems are. Don't take out your feelings about an alcoholic family member or a tenant without evidence.

4. Document Evidence You Find Troubling.

Focus on the behavior, not the person. Never rely on gossip. Just because a neighbor says they saw your tenant at the methadone clinic or an NA Meeting doesn't mean it's true. These behaviors are also normal for people in recovery, who generally abstain from drugs and alcohol altogether.
If you're concerned about a tenant's behavior, collect appropriate evidence. If maintenance sees drug paraphernalia, ask for a photograph. Take pictures of property damage.

5. Take Action Against Dangerous Tenants.

The law does not give any tenant the right to engage in behavior that is violent, destructive, or dangerous to others. Profound destruction of property, threats to neighbors, and regular drunken fights that wake the neighbors or summon the police are not behaviors you should tolerate. When out of your depth or in immediate danger, call law enforcement for help. Contact an attorney if you're uncertain of the best course of action.

6. Be Willing to Make Only Reasonable Accommodations.

Of course, this goes for tenants with any type of disability. Allowing a tenant with limited mobility to install a ramp or shower bars isn't just the kind thing to do--you may be legally obligated to make such accommodations.

However, active addicts are notorious for manipulations. If a tenant requests something outlandish or unfeasible based on their disability status for addiction alone, you don't have to cower or cave. The hard and fast rule for accommodation requests is that they must be both reasonable and directly related to the disability. You don't have to do anything absurd, like allow the addicted tenant to not pay their rent on time because they "need" the money to fund their habit. Just say no. When confused about the law, get professional help.
The bottom line here is simple. Treat the tenant with compassion, but be firm in your boundaries. Boundaries are essential for handling active addicts. If a tenant confides in you that they are in recovery, take care to treat them the same as you would any other. But never tolerate behavior that puts you or your property in danger.

Solo 401k Contribution Limits: What The Self-Employed Need To Know

Real estate investors, like anyone else, need peace of mind and financial security by the time they retire. Luckily, there are a lot of great retirement plan options available today. The most well known types include an individual retirement account (IRA) or a 401(k) plan as offered by an employer. These plans allow account owners to invest in mutual funds, bonds and stocks.

However, did you know both types of accounts come with another option? A self-directed IRA (SDIRA) or self-directed 401(k) plan offers many more investment options than regular IRA or 401(k) accounts do. This includes real estate, life insurance, private placements, precious metals, renewable energy sources and much more.

With such great avenues of investment available to you, it makes sense to want to be able to maximize your contributions. After all, the more money you put into your retirement account, the more you have available to invest and increase your growth potential. This is where the self-directed, or solo, 401(k) really stands out. In fact, unlike your other retirement accounts, a solo 401(k) has an annual contribution limit that can be five to ten times higher. How is this possible? Let us take a look at solo 401(k) contribution limits and types of contributions allowed.

Contribution Limits

The Internal Revenue Service (IRS) regulates the contribution limits for retirement or investment accounts. For a SDIRA, and most other retirement accounts for that matter, the IRS only allows you to contribute up to $5,500 each year. If you start making contributions to your 401(k) account at the age of 30, based on an average return on your investments, this means you will likely only receive $1,000 a month once you retire.

Based on your current cost of life expenses and standard of living, will a $1,000 monthly distribution be enough based on retirement at the age of 65? Most likely, it will not. In contrast, however, a solo 401(k) has a much higher maximum contribution limit. In fact, as of 2017, the IRS allows you a maximum annual contribution of up to $54,000 for anyone under the age of 50. If you are older than 50, this limit is even higher.  

Types of Contributions

The contribution limits alone are among the solo 401(k) benefits. However, a solo 401(k) also offers flexibility when it comes to how those contributions are made. Like an IRA or SDIRA, you can make traditional (pre-tax) or Roth (post-tax) contributions. A solo 401(k) also permits account owners to make a combination of employee deferral contributions and profit-sharing contributions.

As of 2017, the IRS has set the maximum employee deferral contribution limit to $18,000 for a solo 401(k). As the name implies, this type of contribution is one made as an employee. This is the most commonly understood type of contribution; it is the same type of contribution you can make to an IRA, SDIRA, 401(k) or other retirement account. The limit is just higher for a solo 401(k).

Profit-sharing contributions, on the other hand, are the employer or business owner side of the house. With a solo 401(k), the IRS allows you to contribute up to 25% of your annual business income up to $54,000.

It is important to note that your maximum contribution limit is a combination of the employee deferral contributions and your profit-sharing ones. Therefore, if you make a $18,000 employee deferral contribution, you can only supplement it with a $36,000 profit-sharing contribution. However, you can mix and match these contributions to reach that $54,000. If you want to contribute less through your employee deferral investments, you can increase your profit-sharing contributions to reach that $54,000 limit.

Important Things to Note

There are a few things you should note when it comes to your solo 401(k) contributions, however.

Your incorporation status affects the percentage of profit-sharing contributions you can make. If your company is considered a non-pass through entity, such as an S- or C-Corporation, the IRS allows you to contribute 25% of your net W-2 income. However, if you have a pass through entity, such as a sole proprietorship or limited liability company (LLC), the IRS formula is much more complicated. (If this is you, our professionals can help you understand how different pass through entities affect your profit-sharing contributions.)

The IRS allows you to make catch-up contributions if you are over the age of 50. Catch-up contributions increase your employee deferral contributions by $6,000. This means you can contribute $24,000 to your solo 401(k) instead of just $18,000. When combined with your profit-sharing contribution, this gives you a new maximum limit of $60,000 instead of $54,000!

If you have both a 401(k) account through your employer, as well as a solo 401(k) account through your side hustle, your employee deferral contributions of both can not go beyond the $18,000 limit. However, the employer contribution to the 401(k) and your profit-sharing contribution to the solo 401(k) do not affect each other. For example, if you make the maximum $18,000 contribution into your 401(k) account and your employer matches this, you have a total $36,000 contributions. However, if your solo 401(k) side business nets you a $200,000 income, you can still contribute up to 25%, or $50,000, of this. Total, this gives you $86,000 in contributions you can use for investments.

Contributions to your solo 401(k) can only be made in relation to your self-employment activities. You cannot take money from your day job and contribute it to your solo 401(k).

 

When Should a Landlord Hire a Lawyer?

While there are some landlords out there who make a career out of being a landlord, most folks who rent out properties do so because it’s a lucrative form of investment. They own one or a few rental properties and are largely self-educated when it comes to the legal side of the business. In other words, they don’t necessarily keep a lawyer on retainer to answer simple everyday questions. It wouldn’t necessarily be cost-effective to do so.

For those landlords, the question of hiring an attorney is always one of cost versus benefit. Attorneys are expensive, but in certain instances, they can save you thousands of dollars and expedite unpleasant processes. So the question for most landlords becomes: when exactly should I hire an attorney?

When You’re Evicting a Tenant

Eviction is a nuclear option. Not only is the tenant being forcibly removed from the premises, but the eviction will stay on their record for the next seven years. Judges will require a high standard of misconduct committed by the tenant. While eviction lawsuits are expedited, the rules governing eviction lawsuits are strict.

Landlords who have experienced an eviction in the past have a better chance of successfully evicting a tenant. Still, unless you’re a lawyer, there are always going to be unforeseen wrenches thrown into the works. Even if you are a lawyer there may be unforeseen wrenches. Lawyers, of course, are better at anticipating and managing them. Hence, why they’re useful.

If this is the first time that you’ve ever been forced into the position of evicting a tenant, then having a lawyer guide you through the process can make a huge difference. In addition, there are some complex evictions in which even experienced landlords would want to have a lawyer help them. Those include:

When You’re Being Investigated or Sued for Housing Discrimination

The penalties for engaging in illegal housing discrimination are steep. Not only will a landlord potentially face a $16,000 decision, but they can likewise owe other damages to the plaintiff. If it’s HUD or some other agency that’s doing the investigating, it’s a good time to consult a lawyer in order to make sure that your bases are covered.
Worse still, is the likelihood that this information will become a matter of public record and be talked about in the news. Not only would a landlord face damages, but discriminatory practices could potentially damage their reputation in the community. This could, in turn, create problems for their business.

A lawyer will help a landlord manage the process as quickly as possible to avoid it blowing up in the press.

Be sure to check out our article, Housing Discrimination Complaints: What Landlords Need to Know.

Premises Liability Lawsuits

Personal Injury Lawsuits

There are a number of reasons that a landlord can be sued, but one of the most common is a failure to maintain a safe and healthy residence. Tenants can bring premises liability lawsuits if they result in personal injury. In most cases, the tenant will need to be able to show that they attempted to contact the landlord and resolve the issue through some form of communication. For instance, if a damaged railing results in an injury to a resident, they would have to inform the landlord that there was an issue in the first place.

The question that underlies all personal injury lawsuits is the role of negligence. The courts will hold a landlord liable when they knew or should have known about a potential safety problem. Negligence can be inferred circumstantially when a landlord’s responsibilities include certain routine maintenance, or the safety problem was a routine event that could have been foreseen. Otherwise, the tenant needs to explicitly make the landlord aware of the issue. Only if the landlord fails to respond could they then be held liable for injuries that occur on their premises.

Nonetheless, personal injury lawsuits are complex issues and having a lawyer handle them for you will produce the best results.

Property Damage Lawsuits

If a landlord’s failure to maintain his property results in damage to the tenant’s property, the tenant has a right to sue the landlord for damages. Some landlords require that their tenants carry renters insurance which may cover property damage to tenant’s belongings done on the premises.

Liability Insurance

Most landlords carry some form of liability insurance that protects them against potential injuries or property damage caused by their properties. Insurance companies will generally provide a lawyer on your behalf to settle the damages. Insurance companies may, however, not be willing to cover damages when the negligence is obvious or gross, or it violates one of the terms of your policy. At that point, you would need a lawyer.

The Bottom Line

Landlords that own major investments all over the city or make a living off of real estate generally have an attorney on retainer or are themselves, attorneys. For smaller investors, having an attorney on retainer may not make a whole lot of financial sense. There are nonetheless a number of problems that befall landlords in which having an attorney can save them thousands of dollars. In other words, they’re worth the cost.

Protecting your investment means successfully navigating these tricky situations. Defending yourself, in many situations, simply isn’t an option.

You may also want to see our article, How Landlords Protect Themselves From Lawsuits.

State Laws on Landlords' Access to Rental Property

There are many valid reasons why a landlord may need to enter a tenant's property. Perhaps the landlord must assist with maintenance or a necessary repair, enter to take pest control measures, or even help attend to an emergency involving the tenant. Of course, these reasons must be balanced against the rights of tenants to have an expectation of privacy in their own residence. Many people already know that the Fourth Amendment guarantees American citizens the right to be protected from "unreasonable search and seizure." However, that right applies to conduct by the police and other law enforcement agents collecting evidence in criminal cases.

Relationships between tenants and landlords, on the other hand, are determined by civil courts. Most of the law on these issues is determined at the state level. This means that the answer of when a landlord can rightfully enter a tenant's house or apartment varies from state to state. It is vital that both parties understand these issues, and this article will contain information that applies to both landlords and tenants. The following will review some common reasons a landlord may need to enter a property, and under what circumstances he or she may do so. For your convenience, we have listed each state's listed requirements. Note that these are general guidelines that can change over time, and your personal situation will be best explained in your lease agreement. Read on to learn the details.

When Can A Landlord Enter Your Property?

Broadly speaking, a landlord has the right to enter a property in three specific situations:

  1. To make necessary repairs and renovations. Federal law requires rental properties to be "habitable." While the definition of "habitable" can vary depending on your location, landlords are generally responsible for ensuring your home has hot water, electricity, climate control, and other items necessary to a basic standard of living.
  2. To assess the need for repairs and renovations. This goes hand-in-hand with the first major reason a landlord may enter. Note that it is not uncommon for landlords to delegate the matter of repairs. A property manager or even maintenance staff member is typically allowed the same access as the landlord would be personally. Landlords who perform their own repairs are an increasingly rare phenomenon. Typically, this type of detail will be covered in your lease agreement.
  3. In the event of an emergency. This could include a wide range of circumstances. If a landlord learns 911 has been called to your home, they may enter to check on the property or get an idea of what's going on. Similarly, if the landlord happens to be collecting the rent and sees your collapsed body through the window, they may enter to help you. In the case of a medical emergency, most people would prefer that the landlord check on them. Many states also have "Good Samaritan Laws" that protect any person who attempts to render aid in this type of emergency.


Of course, these reasons for entry must be balanced with tenant privacy. Most states have some type of statute requiring that the landlord give the tenant advanced notification. Generally, this notice must be given 24-48 hours ahead of time. Where no time period is specified, "reasonable" notice is acceptable. Even in states where no such laws exist, many landlords provide notification as a courtesy to their tenants.

Are There Exceptions to These Rules?

Because these laws are determined at the state level, we must look to statute to get the most accurate picture of tenants' privacy rights and statutes. Aside from the four common reasons landlords may enter a property we discussed above, there are two more that are specific to certain states.

  1. To show the home to prospective tenants or buyers. This is particularly likely to happen when a tenant's lease is nearly up.
  2. When the tenant is away from the home for an extended period of time. Landlords may enter a home in this situation if the property is located in Wyoming, Tennessee, Hawaii, Iowa, Kansas, Kentucky, Montana, Nebraska, New Mexico, Pennsylvania, Rhode Island, Alabama, Florida, the District of Columbia, or Alaska.

Some states do not regulate privacy in landlord-tenant law at all. Texas and Wyoming, at the time of this writing, have no specific statutes at the state level for any of the issues covered here. Of course, regulations still exist at the local or county level. If you live in either of these states, your best bet is to consult your area's website or seek the guidance of a real estate attorney in your area.

Bottom Line: Check Your Lease Agreement and Communicate

The best way to get information about your specific rights, whether you're a tenant or a landlord, is to refer to your lease agreement. Good communication between landlords and tenants is also crucial. Even where certain privacy rights are not guaranteed by law, many tenants can simply ask their landlord to notify them in the event that the landlord needs to enter. More often than not, reasonable people will respond well to reasonable, polite requests.

If you still have questions after reading your lease agreement and state regulations, the best thing to do is to consult a qualified real estate attorney. Royal Legal Solutions offers assistance to both landlords and tenants. Many of our clients consult with us at every phase of the real estate investing process, from drafting the purchase agreement all the way through managing rental properties and tenant issues. Feel free to ask any general questions you may still have in the comments section below. For advice on your specific situation, contact us today to speak directly with a senior advisor.

Solo 401(k) Benefits: What Small Business Owners and Investors Have To Know

Are you thinking about the best way to save for your retirement? If so, there are several options available to you. It is likely your company has offered you the opportunity to invest in an individual retirement account (IRA) or a 401(k) plan. Traditionally, these options are provided through a pre-selected firm chosen by your employer.

If you are a small business owner (or an employee of a small business), a simplified employee pension (SEP) IRA or Simple IRA may also be avenues you have considered. However, a self-directed, or solo 401(k) plan has benefits that go beyond these options.

Have you not heard of a solo 401(k)? We are not surprised. Although it has been around for almost two decades now, solo 401(k) plans have remained relatively unknown as they are not options provided by most employers. However, they certainly provide plenty of benefits that make them appealing to those who learn of them. Do you want to know why? Keep reading to find out more.

# 1. Higher Contribution Limits

When you compare the contribution of a solo 401(k) to those of almost all other retirement accounts, you will notice that it is substantially higher. In fact, contributions to a solo 401(k) can be five to ten times higher than those made to most other retirement accounts.

Your solo 401(k) also comes with contribution flexibility as well. You may opt for pre-tax, or traditional, contributions. These contributions are tax-deferred, which means they are taxed only when you take a distribution. You can also opt for after-tax, or Roth, contributions. When you have a Roth solo 401(k), your distributions are taken tax-free. Why? Because the Internal Revenue Service (IRS) cannot legally tax you twice for the same dollars. Because you were already taxed on the contributions, your gains and returns are tax-free. If, for example, you made an income of $125,000 through self-employment, your maximum contribution limit for a Roth and self-directed IRA (SDIRA), would be $5,500. (If you are over 50, however, this limit increases to $6,500.) By comparison, your contribution maximum is $18,000 through a traditional 401(k).

You can also make employee deferral contributions and profit-sharing contributions. Like a traditional 401(k), your solo 401(k) has a maximum employee deferral contribution limit of $18,000. Depending on your incorporation status, however, you can also include a profit-sharing contribution of up to 25% of your annual income. That means your maximum contribution limit could actually be $54,000! Using our example of a $125,000 income, with a solo 401(k), you could have an employee deferral contribution of $18,000 plus a 25% profit-sharing contribution of $31,250. This would give you a maximum contribution of $49,250 a year.

# 2. Flexible Loans

Unlike almost all other retirement accounts, solo 401(k) plan owners are able to take out personal loans without paying steep interest rates, IRS penalties, or other such fees. In fact, taking out a personal loan from your solo 401(k) is relatively easy and painless. If you choose a reputable firm, like IRA Business Trust, your loan request can be processed in just minutes. The IRS allows you to easily take out a loan up to $50,000 or 50% of your account value, whichever is less. As long as your loan request abides by this limit, your request is instantly approved. In addition to this, you set your own interest rate and have up to five years to pay off the loan from your solo 401(k). However, if you use your loan to purchase your primary residence, you are permitted to take up to fifteen years instead. You can set the frequency of your repayments as well. While some opt to make regular payments along with their standard contributions, as long as you make a payment every quarter, you are on track. Perhaps best yet – you can use your personal loan for anything you desire. This includes paying off your personal or business debt, mortgage, or buying that new car you have been eyeing.

You may want to note that not all financial institutions or investment firms permit you to take a personal loan. At Royal Legal Solutions, however, we understand that your solo 401(k) is built from your hard-earned dollars. If you want to take a personal loan from your own retirement account, we support you. Our professionals will make it easy for you to get the funds you request.

# 3. Alternative Asset Investments Options

A solo 401(k) will certainly allow you to invest in the same stocks, bonds, and mutual funds other retirement accounts permit. However, a solo 401(k) allows you to invest in much more! While there are almost limitless investment possibilities, some of the most notable include real estate, precious metals, private equity and debt, life insurances, cryptocurrencies, private placements, and renewable energy sources. A solo 401(k) makes investments in these alternative assets easy as well. A solo 401(k) does not require you to establish a limited liability company (LLC) or other business entity in order to invest in real estate. (Although, it certainly will not prevent you from doing so either. After all, an LLC can help you protect your assets and your investment returns.) You also do not need to get the approval of your solo 401(k) custodian. Why? Because the IRS does not require you to have a custodian or trustee in order to open a solo 401(k)! You are also able to take out a non-recourse business loan for your solo 401(k). This will allow you to invest in real estate, bypass the Unrelated Business Taxable Income (UBTI) tax, and protects your solo 401(k) assets from debt claims.  

# 4. Easy to Set Up

Royal Legal Solutions makes your solo 401(k) account set up easy. Our professionals have streamlined the process to ensure it runs as smoothly and quickly as possible. We keep our setup costs low, minimize paperwork, and assist with contribution rollovers.

Tenant Injuries: Landlord Liability and Insurance FAQ

Even a good landlord occasionally finds themselves in a tricky situation. When a tenant injures themselves, there are a number of situations in which a landlord could find themselves liable for the injuries. This is especially true in instances when the tenant has just moved in. Central to the question of liability for premises and personal injury lawsuits is the role of negligence.

In order for a tenant to make a successful case against their landlord, they must be able to prove that the landlord was negligent in their duties to maintain a safe residence. What precisely does this entail?

The Role of Negligence in Premises Liability for Landlords

In order for a landlord to be held negligent in a premises liability suit, the tenant/plaintiff must be able to prove that either:

  1. The landlord knew about the safety hazard and did nothing to correct it
  2. That landlord should have known about the safety hazard

The first criterion pretty much speaks for itself. A tenant makes a landlord aware of an issue, the landlord doesn’t act on that information, and then a tenant or guest is injured because of the safety hazard. This is when the landlord could be liable for the damages.

The second criterion means that negligence can be inferred circumstantially under different situations. For instance, a landlord cannot claim ignorance of the fact that there is lead-based paint on their premises. Nor can they claim ignorance of the fact that any materials that were used in the construction of the property are potentially hazardous. The landlord is expected to know this information and to disclose it to anyone that is paying to reside in the property.

In addition, negligence can sometimes be inferred when a landlord does not provide a careful inspection of the premises before a tenant moves in. If the tenant is injured or has property destroyed due to a preventable and obvious problem on the premises, they can be held liable for damages and injuries.

How to Minimize Premises Liability for Landlords

It should not be a shocking revelation that landlords who keep their premises in excellent condition seldom lose or even have to fight premises liability lawsuits. Making a careful inspection of the property before a new tenant moves in and responding to tenant issues promptly will absolve a landlord of most negligence claims against them.

What you should do:

The Role of Insurance in Protecting Landlords from Liability

One popular way that landlords protect themselves is by investing in General Liability (GL) policies. GL policies protect owners from safety issues that may occur on the premises. They cover the cost associated with potential damages awarded to tenants and the cost of defending yourself against the claim.

What level of coverage should you purchase?

Personal Injury Lawsuits vs. Landlords

A tenant will win a personal injury lawsuit against their landlord when they can prove:

  1. It was the landlord’s responsibility to repair the defect that caused the injury.
  2. The landlord was notified of the problem.
  3. Fixing the problem would not have been unreasonably difficult or expensive.
  4. The injury was the likely result of failing to fix the problem or the injury would not have occurred if the problem had been fixed.
  5. The tenant suffered legitimate injuries as a result of the accident.

If a tenant can prove all of these, or that the landlord should have known about the problem the tenant is entitled to recover:

If, as a result of the injuries, the tenant is left permanently disabled, damages can be awarded into the millions in favor of the plaintiff. If the injuries are caused to a child on the premises, and the result is a permanent developmental disability, you can find yourself in serious financial trouble, to say the least.

The truth is, most premises liability claims against landlords can be easily avoided by carefully inspecting the property before a new tenant moves in, ensuring that you respond to the tenant’s issues promptly, and covering your bases in terms of having the proper levels of insurance. Landlords who follow this simple advice will never have to worry about fighting a premises liability lawsuit.

Tenants' Rights to Privacy and Repairs FAQ

Real estate investors often serve as their own landlords. If you're doing this with your real estate investment properties, it is crucial to understand your role and the legal obligations that come with it. One of your primary duties will be the maintenance and repair of your property. Staying on top of maintenance is essential for having good relationships with your tenants and protecting the value of your investments. Similarly, tenants have their own set of obligations about maintaining the property they occupy. While obviously repairs are inevitable, it is crucial that landlords are aware of tenant privacy rights. Below, we will discuss some of the most frequently asked questions about property repairs, the responsibilities of both landlords and tenants, and under what conditions a landlord may enter a property.
 

Who Is Responsible for Repairs of a Rented Home?

Both the tenant and the landlord have certain rights and responsibilities when it comes to the routine upkeep of the property. While there will be some variation between the states, or even local ordinances and regulations within a state, there are some basic principles that are nearly universal. Let's begin by discussing the typical obligations of landlords.

Landlord's Maintenance and Repair Responsibilities

Generally speaking, the landlord is responsible for keeping the property habitable. Of course, this term is somewhat subjective. But the consensus seems to be that a "habitable" property is one that has the accommodations and amenities for basic human needs. These include access to water, electricity, and other utilities. Landlords are also required to abide by any local building codes for safety reasons. Working locks and smoke detectors are common examples of these ordinances. States with extreme climates, such as Texas or Alaska, may also require the landlord to weatherproof the home and maintain functional central heating and cooling.


Tenant Maintenance and Repair Responsibilities

While the landlord is ultimately responsible for the habitability of the property, tenants have certain responsibilities as well. Some of these are fairly obvious, day-to-day tasks. No tenant could reasonably expect their landlord to do their household chores or cleaning, even though those things certainly impact how "liveable" a property is.

Even major appliances can sometimes be the tenant's responsibility. This is particularly true if the tenant brought the appliance with him/her upon moving into the rental property. Furnished homes may be more complicated in this regard, and these details are usually addressed in rental agreements.
 

What Happens if Landlords Fail to Make Necessary Repairs?
The consequences for failing to make necessary repairs as a landlord can be quite serious. The fall-out can be annoying, costly, or even ruinous. Typically, it is cheaper and overall easier to make repairs rather than delay or resist doing so if your legal obligation is clear.

Some of the unfortunate consequences of shirking your responsibilities as a landlord include the following:


If you're a landlord, the safest and wisest choice to make is always to make repairs as quickly as possible. If you're notified of the need for repair, take immediate action and maintain good communication with your tenant. Documenting communication with your tenant about these issues can also assist you in the event of a lawsuit. If your tenant tries to sue you, you will later be able to show you did your due diligence. The same suggestion applies to tenants as well. If you request a repair, document your end of communications. Taking the time to make a written record of events in the present can prevent many legal headaches in the future. Since most lawsuits are born out of misunderstandings rather than outright fraud, documentation and good communication protect both landlord and tenant.

When May a Landlord Legally Enter Their Tenant's Residence?

Privacy rights of tenants vary based on location. A qualified attorney can help you understand these rights, but here are some of the basics.

1. Do Landlords Have to Notify Tenants Before Entering the Property?

Under ordinary circumstances, a landlord will notify a tenant prior to entering a property for any reason. 24-hour notification is a common practice. Some states also allow landlords to enter to determine whether repairs are needed.

2. What About Emergencies?

While we certainly hope you don't experience a personal or medical emergency as either a landlord or tenant, these things do happen. Many rental agreements spell out certain protocols for emergencies.

Even the police can enter your home if they have "exigent circumstances." An example of exigent circumstances might be if an officer approaches the door, but hears somebody screaming for help inside. While ordinarily law enforcement would need a search warrant to enter your property, these "exigent circumstances" are an exception to that rule.

While obviously police and landlords fulfill completely different roles and are defined and regulated by different types of law, the principle remains the same.

For more details about the laws that state when a landlord can enter occupied property in your state, please refer to our article "State Laws on Landlord's Access to Rental Property" here on the Royal Legal Solutions blog.

We hope that this has shed some light on the basics of privacy and repairs. If you would like to comment on this subject, feel free to share both your positive experiences and horror stories below. Please also feel free to ask any remaining questions you may have. As usual, if you need personal advice about your specific situation, make plans to consult with one of our real estate attorneys today.
 

Landlord-Tenant Statutes, State by State

Wise real estate investors know the importance of guarding against lawsuits. You may already employ an asset protection strategy to protect your investments. Even so, it is always a good idea to be familiar with the laws governing landlord-tenant relationships in your state. You can search your state's website to read the text of the most current statutes, but we realize you're busy and probably don't want to spend your free time deciphering legalize. So we're here to help you understand the most common types of state statutes in plain English.

Federal Laws All Real Estate Investors Should Know

There are federal laws that apply to all landlords and tenants, regardless of where they live in the United States. If you're a landlord, here are some of the most critical federal laws to be aware of:


While these laws are universal, the details vary depending on state. Let's dive into some common statutes and how they are worded in different states.


Landlord-Tenant Laws That Vary By State

While each state has hundreds of pages of law governing the rights and obligations of both landlords and tenants, we're going to cover some of the basics here. Many of these are the same types of a statutes, with different details. Below, we will cover some of the most common types of statutes and provide resources for you to review how they may affect your rental properties.

Security Deposit Limits and Lawsuits

Nearly every state has regulations regarding security deposits. Some of the most common types of statutes will place a hard limit on how much a landlord can require a tenant pay for a security deposit. Ordinarily, the limit is calculated based on rent. While some states will have a dollar amount maximum security deposit, many more simply say deposits may not exceed 1-2 months worth of rent.

Security deposit statutes also outline the circumstances under which a landlord may keep the deposit. Similarly, each state has a finite limit on how long a landlord may take to return a security deposit. These can range anywhere from a week to 60 calendar days.

Disputes over security deposits and their return typically occur in Small Claims Court. Most states will restrict the amount of money that a tenant can recover in damages to anywhere from $1,000-$15,000. Some states, such as Connecticut, have no limit at all on how much a tenant can recover in these types of lawsuits. Occasionally, suits are brought in different venues. In Florida, these types of disputes are settled by the Magistrate's Court. Similarly, security deposit suits in Delaware are handled in Justice of the Peace Court.

Late Rent and Bounced Checks

Bounced check and late rental fees are a common practice. The purpose of these laws is to encourage tenants to pay rent in a timely manner. Some states allow for a "grace period" for tenants to pay late rent before eviction proceedings begin. Florida and Georgia have both guaranteed tenants a right to a three-day period. This allows the tenant to make the payment without threat of immediate eviction.

Eviction Issues: How Long Do Tenants Have to Move Out?

Some common causes of eviction include:


Regardless of your location, you will generally have some time to remove your belongings from the property. How much time will depend on your state's eviction statutes.

"Repair-and-Deduct" or Other Living Condition Issues

If your home needs a vital repair (such as for a leaky roof or a water heater), it is generally the landlord's obligation to attend to this. If a landlord neglects these responsibilities, many states allow tenants to deduct the cost of making a necessary repair from the rent. This concept is known as "repair-and-deduct" rights. Tenants can even sue the landlord for the cost and inconvenience caused if they are forced to make such repairs. Repair-and-deduct rights are not universal. Check this list of state statutes to see if your area offers these rights.

Bottom Line: Understand Your State Laws

That wasn't too painful, was it? Of course, the law is always adapting. Everything that is factual at the time of this writing is subject to change, and by no means is this a conclusive list of the real estate law that may affect you. It would be impossible, for instance, to account for all local ordinances in this space. For this reason, we recommend that real estate investors build a dream team that includes a CPA and an attorney to ensure total legal and tax compliance. A qualified real estate attorney can help you understand the nuances of landlord-tenant law as they apply to your particular investments.

At Royal Legal Solutions, our attorneys aren't just lawyers, but fellow investors. We're here to help you understand and comply with the legal obligations you face as an investor. Begin building your real estate dream team by consulting with one of our real estate attorneys today.
 

Prohibited Solo 401(k) Investments: What You Can't Invest In With a Solo 401(k)

Planning for your retirement while you are still young and able-bodied enough to work is a great idea. Using an individual retirement account (IRA) or 401(k) are some of the most recognized means of benchmarking funds for the day you retire. With an IRA or 401(k) plan, you are able to invest in stocks, bonds, and mutual funds. While these options can certainly generate gains, a solo 401(k) can go beyond this. At Royal Legal Solutions, we strive to provide you with the information you need to make educated investment decisions. Below, we take a look at the investment options the IRS permits and forbids to make sure your solo 401(k) abides by regulations. After all, you want your money to stay in your pockets instead of being subjected to hefty IRS penalties or fines.

Solo 401(k) Investment Options

Also known as a self-directed 401(k) plan, a solo 401(k) offers increased investment opportunities. This includes things like real estate, precious metals, private equity, private placements and renewable energy sources. Known as alternative assets, your investment options can appear limitless. However, there are a select few things that the Internal Revenue Service (IRS) does forbid your solo 401(k) from investing in.

Investments You Cannot Make With Your Solo 401(k)

The IRS allows you to invest in more than what it forbids. In fact, with the exception of the items listed below, the IRS does not define what investments you can make with your solo 401(k). This makes it even more important for you to abide by the few limitations placed on your solo 401(k) investment options.

Collectibles

When it comes to physical assets, collectibles are the only type the IRS does not permit a solo 401(k) to invest in. Included in this list are:

If you should use your solo 401(k) to invest in these items, the IRS will consider it a distribution. Because of this, you will be taxed based on the market value of that collectible at the time of purchase. It is important to remember that early distributions are not only subjected to taxes, but also penalties and fines.
Exceptions: Certain coins, however, are exempt from this rule. As previously stated, your solo 401(k) is allowed to invest in precious metals. Because of this, coins or bullions that are at least 99.5% pure gold, silver, platinum, or palladium are exempt from the IRS collectible regulations.

S Corporation Stock

Like other types or retirement accounts, your solo 401(k) plan can still be used to invest in mutual funds, bonds and stocks. When it comes to stocks, however, there is one exception. According to the Internal Revenue Code (IRC), Section 4975 (16), retirement plans of any type are not permitted to purchase or own any type of S Corporation stock. A retirement plan is considered a type of trust. By purchasing or owning stock, a solo 401(k) would be considered a shareholder. Trusts are expressly forbidden by the IRS from being shareholders of an S Corporation.
Exceptions: As with collectibles, there are exceptions to this rule. Solo 401(k)s are allowed to invest in any other type of business entity. This includes C Corporations, limited liability companies (LLCs), sole proprietorships, and partnerships.

Prohibited Transactions

The IRS also prohibits transactions with disqualified persons. This is true for any type of transaction, even if it would otherwise be considered legitimate. Disqualified persons are defined by the IRS to be ancestors, lineal descendants, and individuals or entities connected to the solo 401(k) itself. Ancestors include your father, mother, and grandparents. Lineal descendants are your spouse, children, grandchildren and other such persons. A corporation or property that is owned or controlled by your or a family member is an example of a connected entity. This may seem confusing. To help keep yourself within regulations, there is one main question you should ask. Will I, or any of the individuals listed by the IRS as a disqualified person, benefit directly or indirectly from the transaction or investment? If the answer is yes, you should avoid the transaction.
Exceptions: Siblings, aunts, uncles, nieces, nephews, and cousins are not disqualified persons. The same is true of the same indirect relatives of your spouse. Stepchildren are also not considered to be disqualified persons. This means that transactions with these individuals are legally permitted by the IRS.

Hire a Professional You Can Trust

At Royal Legal Solutions, our experts have plenty of experience. As a reputable avenue for opening a solo 401(k), we make the process quick and easy. Our professionals are committed to each and every customer who opens an account with Royal Legal Solutions. If you have questions or concerns regarding retirement accounts, investment options, and IRS regulations – our staff have the answers. Please contact us today for more information regarding our retirement account options and how we can help you save for your golden years. We all want to avoid worrying about money when we retire. With a reputable professional at your side, your retirement plan has the potential to grow exponentially.  

Mold in Rentals: Landlord Liability, Responsibility, and Prevention

Mold is a serious problem in a number of older homes. Not only can mold aggravate your tenant’s allergies, but it can decrease their quality of life, reduce their productivity at work, and even present serious health problems.
For landlords, no matter where you live in the U.S., it’s your responsibility to ensure that the place you are renting out is safe and habitable. All across the country, renters have won major personal injury lawsuits against their landlords in toxic mold exposure cases.

You can bet they’re going to go after you when their children start coming down with symptoms of mold exposure. Daily exposure to mold causes a condition called CIRS (Chronic Inflammatory Response Syndrome). Symptoms of the disorder include:

The sheer volume and variation of symptoms make it difficult for doctors to diagnose the problem. Nonetheless, toxic mold exposure can take a serious toll on a person’s life, and landlords can be held liable if it does.

Toxic Mold Exposure and the Law

Most states do not have mold-specific laws on the books. Nonetheless, the statutes that govern premises liability and personal injury liability remain the standard by which such cases are judged. That means the role of negligence governs the question of liability.

In order for an individual to be guilty of negligence in a premises liability lawsuit, that person must be aware that the problem exists or should have been aware that the problem existed. In other words, negligence can be inferred circumstantially in some cases. When the issue is toxic mold exposure, it’s not incredibly difficult for landlords to be held liable for having allowed a toxic environment to fester.

For instance, a landlord should conduct a thorough inspection of the premises before a new tenant moves in. If a tenant moves in and begins to display signs of CIRS, they have every right to recover damages from the landlord.
In states that do have mold-specific laws on the books, the burden is redoubled on the landlord to ensure that the environment is safe for their tenants. That could mean forcing the landlord to conduct timely inspections to make negligence even easier to prove.

Defending Yourself against Mold Tort

How Do You Know it Was Mold that Caused Your Symptoms?

There is a considerable amount of debate in the scientific and medical community concerning what kinds of mold are potentially toxic. Suffice it to say, if your tenant comes to court with medical reports, a diagnosis of mold exposure, and toxicity reports on the mold itself, it’s going to be very difficult for you to prove otherwise.

You Can’t Sue Me, It’s in the Lease Agreement!

Some landlords believe that, as a condition of their lease, they can write in a clause that absolves them of liability. It’s hard to imagine, however, that any state in their right mind would actually let a landlord off the hook for renting out a toxic environment. It presents a danger to public health.

You Caused the Water Damage which Led to the Mold…

This is a valid defense. If the tenant’s own negligence led to the presence of mold, the landlord can successfully argue that they are not liable for the tenant’s symptoms. However, if the tenant made them aware of the water damage, that effectively passes the hot potato back to the landlord whose duty it now is to remove the mold, regardless of who caused it. The landlord is free to charge the tenant, under the lease agreement for damage to the property.

Prevention and Cleaning of Mold

Mold likes moisture. Homes in the more humid areas of the U.S. are much more likely to require mold maintenance than those in more arid climates. In addition, mold likes dank and dark places that see a lot of wetness and moisture. The landlord or their property manager should be on top of making whatever repairs are necessary to ensure that their property is habitable.
How do you do that?
Firstly, each time a tenant moves out, you should inspect likely areas for mold. While it may not be readily apparent that the mold is toxic, it’s not exceptionally difficult to clean up either. Mold can generally be cleaned with bleach. This works on smaller mold buildup jobs that you will find below sinks and the like.
So long as the mold doesn’t dig its way into the wood cabinets, you will not need to dump thousands of dollars into their replacement.

The Bottom Line

As a landlord, if your tenants get sick because of mold toxicity, there are very few instances in which a jury will not find in their favor. So long as they can prove that it is more likely than not that their symptoms were caused by mold exposure, the landlord will lose the case. That’s why it’s incredibly important to document the property in pictures before each tenant moves in.
The one reasonable defense a landlord has, in a well-prepared case, is that the tenant’s own actions resulted in their exposure to mold. Before and after pictures can make this case. Nonetheless, there are limitations to such a defense. For instance, you may still be liable if the tenant reports the mold damage to you and you don’t act on that information. As always, the laws will differ from state to state, but correcting mold damage immediately is never a bad idea.

 

Interested in learning more? Check out our article Tenant Injuries: Landlord Liability and Insurance FAQ.

UBTI / UBIT / UDFI And Your Solo 401(k)

Are you saving for your retirement years? For many, a 401(k) allows them to benchmark and grow their retirement account. Unlike an individual retirement account (IRA) or a traditional 401(k), a solo 401(k) allows you to invest in much more than just mutual funds, bonds and stocks. Real estate, precious metals, private placements, renewable energy sources and many other alternative assets become available to investors through a solo 401(k). Because of these investment options, a solo 401(k), also known as a self-directed 401(k), gives you plenty of options that will help you diversify your portfolio. Like a traditional IRA or 401(k), however, a solo 401(k) is typically considered a tax-deferred account. Why? Because most individuals choose to use their pre-tax dollars to fund the account. However, there are certain situations in which a solo 401(k) account will owe taxes prior to a distribution at the age of retirement.

UBTI Rule

As with all other forms of income, the Internal Revenue Service (IRS) has established regulations that govern retirement accounts. Because solo 401(k), and a few other investment vehicles, are able to invest in business entities, the IRS recognized a potential loophole. To prevent this, the IRS establish the “Unrelated Business Taxable Income (UBTI) Rule.” (UBTI is referred to as an Unrelated Business Income Tax (UBIT) as well.) Defined under the Internal Revenue Code Section 512(a)(1), the UBTI Rule basically stated that income is to be treated as unrelated if the income generating activity is:

  1. A business or trade;
  2. Regularly carried on; and
  3. Not substantially related to furthering the organization’s exempt purpose.

The three factors above are very important to understand. A business or trade, as defined by the IRS, is any activity that results in the generation of income through the sale of goods or providing of services. A regularly carried on activity is one that is occurs on a repetitive cycle. This even extends to seasonal activities, such as the sale of holiday postcards to raise money for a non-profit. The size and extent of an activity is important in the determination of a tax-exempt status. If an activity appears larger than necessary, the IRS is likely to treat is as unrelated. The IRS will examine the sale of each item in order to determine if it is considered “related” or “unrelated” and if the UBTI rule applies. Why does this mean your solo 401(k) may need to pay taxes? Let us take a look.

UBTI Taxes and Pass-Through Entities

Pass-through entities, such as a limited liability company (LLC), do not directly pay taxes. Instead, their income passes through them and to the entity that owns them. If an LLC is owned by an individual, that person pays those taxes as it is considered a personal income. However, many solo 401(k) owners opt to establish their own LLC’s, or other pass-through entities, in order to protect their investments and increase their capital. For more information, check out our previous piece on how to protect your assets with an LLC or other business entity. This is where the UBTI rule comes into play.

The UBTI tax is rather large. At 40%, most owners do try to avoid incurring this tax. If you own or invest in a C-Corporation, however, you are in luck. C-Corporations are not considered pass-through entities. They pay taxes every year. Because of this, they are exempt from the UBTI rule.

UBTI/UDFI and Solo 401(k) Real Estate

One of the many benefits of a solo 401(k) account can take out a non-recourse business loan. This is often borrowed from an individual or a business entity. A non-recourse loan is typically considered debt financing. This means the solo 401(k) is not subjected to paying UBTI taxes on any incomes generated through that loan. (An Unrelated Debt Financed Income (UDFI) is not subjected to the UBTI rule.) Therefore, if the solo 401(k) uses a non-recourse business loan to purchase real estate, instead of using a LLC directly, the owner will not have to pay that 40% UBTI tax on any income generated by that property!

IRA Business Trust Can Help

The professionals at Royal Legal Solutions know how important it is to avoid violating tax regulations. We also know that you worked hard for your retirement finances and you deserve to keep as much of them as possible. If you would like to learn more about retirement accounts, like a solo 401(k), IRA Business Trust can help.

Lead Disclosures for Rental Property FAQ

Lead-based paint and heavy metal poisoning are one hazard that the government will expect landlords either to have professionally removed or disclose before renting out the property to tenants. This is going to be especially vital for tenants who are renting with children. Children suffering serious injuries due to lead poisoning has to be a landlord’s worst nightmare. Especially if the landlord did not disclose that information to his or her tenants before renting the property.
The law involving lead-based paint is established at the Federal level. This does not, however, prevent state and local ordinances from imposing stiffer fines or making the thresholds for culpability lower.
If you’re a landlord buying or renting older houses, it’s your responsibility to determine whether or not there is lead in the paint. This fact must be disclosed according to Title X Residential and Lead-Based Paint Act of 1992.

Exemptions to Title X Lead-Based Paint Disclosure Regulations

There are some properties that are not covered by Title X. Those include:

For obvious reasons, lead-based paint disclosures are designed to protect children from potential lead poisoning. The general rule of thumb is, if a child cannot or is not expected to live on the premises, then the landlord would be in the clear for disclosure. This includes vacation spots, single room apartments, and senior living facilities.

Lead Poisoning Symptoms

One of the reasons why the fines and regulations on lead-based paint disclosure are as heavy-handed as they are is due to the fact that lead toxicity can have a severe and lifelong impact on the development of children. In other words, many of the problems that are caused by lead poisoning may not be reversible.
Children who are affected may suffer from lifelong learning disabilities and developmental delay. On top of that, they may experience:

Lead poisoning can cause problems during pregnancy as well, including premature birth, low birth weight, and miscarriage.
While children are primarily impacted by lead poisoning, adults can be affected too. Adults can experience abnormally high blood pressure, muscle and joint pain, abdominal pain, mood disturbances, and low sperm count.

Lead Disclosures and Renovations

Landlords renovating properties that were built prior to January 1, 1978, must disclose lead hazard information to any and all occupants of the property at the time of the renovation. This includes apartment complexes where common spaces are being renovated. All tenants that would be affected by the lead hazard must be informed within 60 days of the renovation. If it’s a common area that’s being affected, then the landlord must distribute a notice to every occupant in the building.
 
The EPA defines a “renovation” as any disturbing of a painted surface under the Toxic Substances Control Act. The EPA also provides a pamphlet that must be handed out to tenants before the renovations begin. The title of the pamphlet is: Protect Your Family from Lead in Your Home”.

Other Potential Health Hazards in the Home

Lead is not the only potential health hazard one can find in a home. On top of lead, landlords can be held liable for asbestos as well. OSHA is the agency responsible for setting the standards concerning asbestos. The landlord is responsible for testing, disclosure, and maintenance of all buildings constructed before 1981.

Lead in Your Rental Property? These are Your Responsibilities

If you’re a landlord who is renting an older home the responsibility to inform your tenants about the possible dangers in your home falls squarely on your shoulders. In addition, the EPA is quite specific about how this is supposed to be done.
 
Before either signing or renewing any form of rental agreement, a landlord must disclose any knowledge of lead paint or other hazardous chemicals or materials on the property. In this instance, a landlord claiming that they didn’t know about a potential hazard will not save them from negligence liability. As a landlord, it’s your job to know.
The procedure for disclosing the presence of hazardous materials in a rental property is a formal process. It requires that both you and your tenant sign off on the disclosure. An example form for this process can be found on the EPA’s website. The landlord is then required to keep the signed copy of the disclosure with their rental documents for the next three years.
In addition, the landlord is required to provide every tenant with the EPA approved pamphlet that discusses the dangers of lead paint. That can be downloaded and printed for free from here.
What are the penalties for failing to comply with this regulation?
They’re steep. The state will fine landlords $16,000 per violation. In addition, if a tenant is insured because of undisclosed lead poisoning, the landlord will be liable up to three times their total damages.
 

Solo 401(k) Eligibility: How Do I Know If I'm Eligible?

Individual retirement accounts (IRAs) and 401(k) accounts are two of the most well known types of retirement accounts available today. However, self-directed, or solo, 401(k) accounts are growing in popularity and there are plenty of reasons why. Not only can you invest in traditional things, like stocks, bonds and mutual funds – you can also invest in real estate, precious metals, renewable energy sources, foreign currency and so much more. Unlike self-directed IRAs, you do not need a custodian in order to make your investments. With complete checkbook control, your investments are entirely up to you, made when and how you want to. In addition to these more diverse investment options, they also come with higher limits for contributions, personal loans, and more. Have we peaked your interest? If so, you might wonder how you can qualify for such benefits.

How Do You Qualify?

You may not realize this, but qualifying for a solo 401(k) account is rather easy. There are only two main eligibility factors must be met in order to qualify for a solo 401(k) account. Let us take a look.

1.   Self-Employed Income

The first requirement revolves around owning a business and generating income. In other words, you must own your own business, which generates profits on a full-time or part-time basis.
First, let us discuss what type of business entities qualify. According to the Internal Revenue Service (IRS), you are considered self-employed if you own and operate one of the following business entities: sole proprietorship, limited liability corporation (LLC), C- or S-corporation, a partnership, or a limited partnership.

While there is paperwork associated with many of these types of business entities, you may want to note that the IRS defines a sole proprietor as someone who owns an “unincorporated business” by his or herself. As such, there is no official paperwork that is filed to formally establish this entity. Therefore, if you have a side hustle, such as selling homemade wares on Etsy, offering freelance writing services, or self-publishing that novel you have been working on – you qualify as a sole proprietor.

Now that you have established whether you own a qualifying business entity, you need to determine whether or not you display “self-employment activity.” In short, the IRS views generated incomes as proof of your self-employment activities. You should also note that the IRS does not care about how much time you spend on your business so long as you have a reported income generated by it.

This means that whether you are full-time, part-time, or even just supplementing your primary income through a side hustle, the IRS considers the income a qualifying activity. Therefore, even if you generate very little income, this is still proof of your business operations and qualifies you for a solo 401(k) account.

Additionally, even if you have a full-time job elsewhere, if you own a business that generates income, you can simultaneously hold a retirement investment account through your job as well as a solo 401(k) through your entity.

2.   No Full-Time Employees

Per the IRS Internal Revenue Code, as a self-employed individual, you cannot have full-time employees working for your business entity. There are a few exceptions, however. An employee is excluded if they: a) work less than 1000 hours a year, b) are under 21 years old, c) are union workers, d) are a non-residential employee or e) are an independent contractor. Additionally, if your spouse works for your business, the IRS considers them an “owner-employee” and exempts them as well. Similarly, any partners in a partnership or member of an LLC are also exempt.

What to Do If You Qualify

After reviewing the two eligibility factors above, do you qualify for a solo 401(k) account? If so, you may want to look into opening an account quickly. After all – the investment opportunities alone go beyond those of almost every other type of retirement account options. This type of diversification, in addition to the unparalleled level of control you have over your solo 401(k) account, are benefits worth investing in.

At Royal Legal Solutions, we want to see your retirement dreams come true. Having the financial security to retire and live comfortably is a goal almost all American’s share and we are no different. Our experts want to help you get there too. If you have questions about opening a solo 401(k) account, want to know more about retirement accounts in general, or want to clarify any of the numerous IRS regulations that govern your retirement funds, contact us today.

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 number possibilities in terms of investment options. Typically, IRAs avail their holders to a small set of options, usually mutual funds and bonds. Holders of a self-directed IRA, however, can 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 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.
 

 

Asset Protection For Real Estate Investors in Texas

The rumors are true, folks: everything really is bigger in Texas. This can be a double-edged sword for real estate investors in Texas, because while the state has many big opportunities for investors of any budget, the lawsuit business is also big. And real estate investors are more likely to be sued than the average Joe or Jane. So if you want to take advantage of the many opportunities and rewards available for investors in the Lone Star State, you will definitely want to be aware of the quirks of investing here as well as how you can protect yourself. A high-quality, iron-clad asset protection plan can prevent you from ever being victimized by a suit, but it will also protect the majority of your wealth even if you are sued.

In Texas, real estate investors have special concerns about asset protection that we will review below. But we will also show you how some simple precautions, the right information, and good professional help can protect your investments and other valuable assets. Let's dive in.

Why Do I Need an Asset Protection Plan?

The short answer is that anyone with assets worth having at all should have an asset protection plan. This is especially true for real estate investors, or other types of investors who own valuable assets of any type. The suggestions in this article work just as well for protecting an expensive vehicle or other asset as they do for real estate.
Attorneys are like vampires in more ways than we care to admit. Only instead of feeding on blood, we have an unhealthy dependency on money. And you better believe that we love money as much as vampires like blood. So asset protection keeps the legal vampires away by ensuring that they can't feed on your blood/money. Sucking the lifeblood out of a lawsuit makes it an unattractive endeavor for any attorney who might come after you or your assets. Even the most cash-thirsty lawyer in the world won't file against you if you're difficult to sue, or just plain not worth enough to make it a wise expense of his/her time. Asset protection makes you both of these things.

Key Asset Protection Tools for Texas Investors

The Texas Series LLC

The Series LLC is among the strongest asset protection tools that any real estate investor can exploit. Not all LLCs are created equally, and the costs and legal protections they offer depend heavily on which state the LLC is formed in. Fortunately for Texans, you can go local.  The Texas Series LLC is a highly effective asset protection structure. As an added bonus, it's easier to set up a Series LLC in your home state because you'll be free of the legal requirement to have a registered agent. Agents aren't free, so you'll be saving money by using this structure.
The Texas Series LLC is booming in popularity in part because it's the gift that keeps on giving. It operates similarly to a Traditional LLC, but has the distinct bonus of allowing you to add assets to the structure indefinitely. The Series LLC uses a parent-child structure which allows you to add new assets to the network as you acquire them. Each asset will have its own "child" LLC, complete with liability protection. In practice, this means that when you buy a new property, you will only need a few minutes at your computer and your attorney's signature to add it to your LLC network.

Anonymous Trusts

Anonymity is absolutely crucial to an effective asset protection plan. When you use an  Anonymous Trust alongside the Series LLC in conjunction with the Series LLC, your assets receive an additional layer of protection. The Anonymous Trust allows you to own and operate the Series LLC without your name ever even appearing on it.

This method protects you by making it nearly impossible to prove you own the assets in question in the event of a lawsuit. Even if someone knows you own it, they won't be able to prove it in court. The fact that you can't be reasonably or easily connected to the property will make it nearly impossible to sue you personally. Its placement in the series limits the amount you could be sued for in the first place, making both you and the asset highly unattractive targets for us money-hungry attorneys. We don't hunt if there's nothing to feast on.

Of course, there are other tools you can use to beef up your asset protection plan. Our experts combine land trusts, contracts, and many more legal and banking strategies to design the most effective plan for you.

Start Protecting Your Assets Today

Don't hesitate any longer. If you're an investor in Texas, you don't want to risk the investments you've poured your heart, soul, and hard-earned resources. All it takes is one suit to clean you out of everything. Don't let the vampires get to you. Use the tips above to form an asset protection plan that is more powerful than a house full of silver stakes, garlic, and crosses. At Royal Legal Solutions, we are here to make sure you get to keep the things you've worked your whole life for. Call us today to set up an asset protection consultation, and we will help you build the best possible asset protection strategy for your individual needs. Let us deal with the vampires while you focus on your business, free from the stench of garlic or civil court.

Thanks for reading, and if you have any additional questions about investing in Texas, fire them off in the comments below. We love making sure investors have access to this important information.
 

Asset Protection For Real Estate Investors in California

Real estate is big business all over the country, but savvy California investors must be aware of the limitations and unique concerns they face under state law. While California is a popular place for residents and investors alike due to its scenic nature and abundance of real estate opportunities. However, the state is not known for being especially pro-business. This means, you need to be aware of the information below before forming your asset protection plan. Read on to learn the importance of asset protection for your real estate investments, basics of what you will need for the most successful plan, the special circumstances of investing as a Californian, and how to get around state restrictions to grow your business at the lowest cost possible.

Why Do I Need an Asset Protection Plan?

All investors will need an asset protection plan eventually, and it's best to have one in place before you even start investing at all. The simple reason is this: without an asset protection plan, a lawsuit can absolutely ruin your life. Even if the suit is frivolous or irrational, you can still lose. You don't even have to be rich to become a target. You just have to have more than someone else. And everybody has something that is attractive to someone less successful than themselves. Unfortunately, we live in a country where 1/4 of our citizens will face a lawsuit in their lifetime. These figures are even higher for real estate investors.
As investors ourselves, we know that you work hard for your profits and properties. That is why we're so passionate about this subject. With a few simple preparations, you can be inoculated against a lawsuit that could clean you out of everything you own.

How Does Asset Protection Work?

Asset Protection works by minimizing your liability as well as the appearance of your assets' value. A good asset protection plan keeps your personal name off of your property, so that you are incredibly hard to find and nearly impossible to tie to your assets. This way, if anyone comes after you or your business, you won't look like an impressive target. Your personal assets are safe if a business asset is sued and vice versa.

In short: asset protection works by making you a pain in the butt to sue. Attorneys are money junkies. If you don't look worth their time, you're safe.

Key Asset Protection Tools for California Residents

California residents will run into unique issues as real estate investors. All investors should use an entity as the basis of their asset protection strategy. But in California, you will pay a lot more for an in-state entity. Some of the costs you will face are an $800 minimum franchise tax, higher annual fees to maintain the LLC, and unfavorable tax treatment. There are also more restrictions on how you're able to run your business. Fortunately, the following tools can help you minimize these costs, simplify your business's growth, and give you greater control over your burgeoning real estate empire. When employed together, these tools have proven time and again to be extremely effective lawsuit prevention methods as well. Let's talk about them one by one.

Series LLC from Out of State

California LLCs have high annual costs and do not offer the most effective structures for real estate investors. Fortunately, you have alternatives. You can form an LLC in a state with more favorable liability protections and overall costs. Even better, you can form a Series LLC. This entity will allow you to develop your real estate investments infinitely, streamline your business, and serve as the key structure for your asset protection plan. The three best options for Californian investors are:

No matter which of these options you decide to go with, you will have to register an agent. This person is your point-of-contact for all legal and business matters. Think of him or her as your in-state representative for business purposes. We've written more extensively about Registered Agents and how to find them, but all you need to know for now is that Royal Legal Solutions is here to assist you through this process. We can find you an affordable agent so that you can take advantage of the best Series LLC product for you. We can even serve as your agent for a Texas LLC.

If you already have an LLC, that's fine! Our experts at Royal Legal solutions can help you incorporate your LLC into a Series LLC based in another state.

Trusts and Anonymity Protections

Anonymity is absolutely essential to the success of your asset protection strategy. As you may recall, anonymity protects you by distancing your individual means from your investments and other assets. You may be wondering what tools you will need to accomplish this. Fortunately, we offer a full-service Series LLC with Anonymity Protection. We use lesser-known legal and financial tools such as:


Of these, trusts are the most effective legal structures. Anonymous trusts work by placing the ownership of your Series LLC or other business entity in a corporate name of your choosing. Employed correctly, this effectively prevents anyone from finding any record that you even own the property in question. Your name will be nowhere to be found on the public record. Even better: if the person suing you knows for a fact you own the land, they won't be able to prove it. Land trusts serve a similar function, and can be used on their own or in conjunction with Anonymous Trusts to further distance you from your property. But land trusts also have distinct tax benefits and can be held by accounts as well as entities.
So for all our Golden State readers, are you ready to form your asset protection plan? Proactivity on your part can guarantee the success of your business and security from lawsuits in the future. If you're already investing, don't wait until it's too late: consult with a qualified attorney and develop the best asset protection strategy for you today.
 

The Business Trust Owned Self-Directed IRA

A business trust is an IRS-approved entity for handling IRA investment funds. With a business trust, the investor becomes the trustee and gains management rights over investment funds. We’ve seen investors gain checkbook control over their self-directed IRA using this method. Besides more control, investors can enjoy reduced cost and investor confidentiality. Let’s discuss these benefits and how we can help you get started with a business trust for a self-directed IRA today.

Investing Efficiency and Control

Using a business trust for a self-directed IRA allows for more efficient investing. We’ve seen investors wait up to three days for their investments to go through the typical custodial review process. The advantage of a business trust is that the IRA owner become trustee. As trustee, they gain management control over investment decisions, rather than giving up this control to a custodian. Once a business trust is established, the trustee can open a checking account for IRA funds to be held. Investing then becomes as easy as writing a check. With this ease, investors no longer have to worry about delays on investment opportunities or recurring fees.  Our technology uses a similar trust structure to cut out custodial involvement and the need for in-person or mail transactions.

Save Hundreds on Taxes

Business trust are exempt from state franchise taxes, which are taxes imposed on corporations, partnerships and LLCs for doing business within a state. These taxes are usually charged annually. In California, the minimum franchise tax is $800. However, a 2016 Chief Counsel Ruling decided that business trusts are not considered corporations and thus exempt (1). In contrast, self-directed IRA LLCs don’t enjoy this exemption.

Save on Redundant Fees

The self-directed IRA for real estate investing is popular for several reasons. However, choosing an LLC as the holding entity for a self-directed IRA can incur costly fees. This is especially true for out of state real estate investments. Investors must register and pay a fee to conduct business in a new state. They may have to hire an additional agent to comply with state by state licensing requirements. Like the franchise tax, these IRA management fees can be avoided by using a business trust for the self-directed IRA.

Avoid Filing Taxes

A business trust can avoid filing both federal and state income taxes by qualifying as a “disregarded entity.” According to Professor Carter G. Bishop: “Under a default rule, all business trusts are considered either disregarded entities (one beneficiary) or partnerships (two or more beneficiaries) (2).” When using a business trust for a self-directed IRA, the IRA becomes the sole beneficiary and thus qualifies the trust as a “disregarded entity.” In contrast, using an LLC that qualifies as a “disregarded entity” isn’t guaranteed both federal and state tax filing exemptions. In California, LLCs are required to file state taxes regardless of entity status. Using a business trust owned self-directed IRA can save on these costly and time consuming tax filing requirements.

Maintain Confidentiality

A business trust self-directed IRA allows investors more confidentiality. Unlike an LLC, where the agent’s name must be kept in public record, a business trust keeps the trustee name confidential. Some states also require the LLC agent’s address be included in its Articles of Organization. Unfortunately, in Nebraska, Arizona and New York LLCs are still required to give public notice in local publications. With a business trust, IRA owners can enjoy anonymity. Investors can establish their business trust and enjoy self-directed privated investing all in one online platform. No leaving home or filing public documents required.  

Forming Your Business Trust

Like an LLC, forming a business trust begins with drafting required legal documents. For a business trust, the starting point is the Declaration of Trust. This document is similar to an LLC’s articles of incorporation in that it defines the nature or purpose of the trust. The rights of the trust beneficiary and who is named trustee are all critical to obtaining the benefits mentioned above. We can help ensure accuracy and position investors like you for maximum cost savings and tax benefits. We also streamline the self-directed IRA setup process, including business trust formation.

Stay Compliant

We’ve discussed some of the benefits of using a business trust for a self-directed IRA. These benefits all lead to time or money savings and increased confidentiality. However, structuring a business trust for a self-directed IRA is a detailed process. Several of the compliance requirements you’d find with an LLC and basic custodian managed self-directed IRAs still apply. We’ve developed a wealth of expertise when dealing with these compliance concerns. We can help you form your business trust owned self-directed IRA and provide further consultation on plan structuring and IRS regulations. Call us today at (425) 449-4554 for a consultation.
Sources:

  1. California FTB Says RIC Business Trusts do not Owe Minimum Franchise Tax
  2. Dealing with ‘Check-the-box' Regulations