I was recently speaking with a husband and wife couple in the Mount Juliet area regarding their rental properties and other investment properties. This couple owned properties in Tennessee and outside of Tennessee. In addition, this family also had a small business that they were silent partners in that was generating them a decent amount of revenue. When I asked this family how their investment properties were titled, they told me that they own them jointly.
Unfortunately, this is a far too common occurrence when it comes to being a part-time real estate investor or a part-time investor in order to generate an additional extra revenue and income. The main legal issue from titling property jointly in your own name is that it subjects you to unnecessary liability exposure.
Example: John and Jane owned a home, two luxury cars, and approximately $500,000 in financial assets. However, John and Jane also owned a rental property that was fully leased to several tenants. John and Jane owned both rental units jointly in their own names as husband and wife. One of their tenants slipped and fell down the stairs in the stairwell because the lighting was poor and one of the steps was missing. John and Jane’s tenant sued them and obtained a $1 million judgment. John and Jane only had a $500,000 policy on the rental property. Therefore, John and Jane had to pay the remaining $500,000 themselves. As a result, John and Jane had to liquidate several financial accounts to pay the judgment that completely wiped out their savings. In the end, John and Jane had nothing.
Using the example above, if John and Jane had titled their rental properties in the name of a Limited Liability Company (LLC), then John and Jane would not have been subject to personal liability and potential loss of their life savings. An LLC is a separate legal entity that many people use to shield their personal assets from liability. For instance, using the example above. John and Jane would create and establish through the Secretary of State’s Office the John and Jane Real Estate Investment, LLC. Thereafter, John and Jane would retitle their two rental properties into the name of the John and Jane Real Estate Investment, LLC.
If John and Jane had been sued in the same manner, only the LLC could legally be subject to a lawsuit. This means that John and Jane’s personal assets would not be subject to loss. Only the assets of the LLC would be subject to loss. Therefore, in a worst case scenario, the rental properties may have had to be sold to pay the judgement. However, this is much better than John and Jane liquidating their entire life savings to pay the $500,000 judgment from the lawsuit.
However, there are multiple procedures involved. First, there are fees and annual reporting requirements with the Secretary of State’s Office. In addition, Tennessee has a Franchise and Excise Tax that could impose additional taxes as a result of establishing an LLC. If you have specific questions regarding the Franchise and Excise Tax you should speak with a CPA or tax professional.
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