What Is Real Estate Asset-Protection & How To Start?

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Summary: In this article you’ll learn about real estate asset protection. Topics include what is asset protection, how you can protect your property from the IRS, why you should put your rental in an LLC and more.


Many real estate investors don’t think about asset protection until it’s too late. Don’t make the same mistake. Learn how to protect your real estate investments in this thorough introduction to asset protection.

You’ve worked hard to build your wealth or you are in the process of doing so. Asset protection is a strategy developed to help protect or guard that wealth over the long term. In its broadest of terms, asset protection and preservation is a legal way of protecting your assets from third-party claims such as creditors or individuals. It is one of the most important steps you can take as you work to build a business or secure a sizable portfolio.

Consider for a moment what would occur if a creditor filed a claim against you or your business. If your business is not structured properly, not only can those assets be used to settle the claim but your personal assets can also be on the line. With proper asset protections in place, you can legally avoid some of the most significant and expensive risks including creditor claims. It’s a complex matter, but understanding some of the basics is an essential step for today’s business owner.

What Is Asset Protection?

Asset protection is the development of a strategy that protects your assets from creditors. It is not a tool just used by those that are very wealthy. It is applicable to most people especially those that own investments, a business, or a portfolio. The goal is to protect your assets from creditors legally. Because any person can be sued for any reason, this strategy helps to stop creditors from accessing these assets for payment of settlements, credit card debt, or lawsuits.

There are numerous methods to asset protection. This includes moving funds into an appropriate trust, such as an irrevocable trust and using larger contributions to Individual Retirement Accounts, or IRAs. It may include the creation and use of a limited liability company or retitling assets. It is important that the methods used be legally binding, which is why it is very important to work alongside an established professional to create and implement these strategies. Additionally, it’s important to know that asset protection does not violate any law but rather uses laws to help protect your assets.

What Is Asset Preservation?

Asset preservation is another very valuable type of tool used to help protect your real estate investments. This term can be used for a variety of things. For example, it is sometimes used to discuss how assets are managed while you are alive, compared to a will which outlines what happens to your assets after you die. Another common use for this term has to do with creating wealth protection strategies, such as asset protection methods.

Asset preservation is often linked to estate planning and with good reason. How you hold and manage these assets in the time that you own them can impact those assets’ values. For example, depending on whether or not you use a trust, your assets may face tax implications. However, it is possible to structure assets in such a way as to minimize taxation and to gain better protection of those valuables.

The ultimate goal of asset preservation and asset protection is the same. It is to minimize what can be done to these assets to reduce their value. Creditor claims and taxation can create vulnerabilities for asset owners. Yet, there are very safe and legal ways to structure and hold these assets that work to reduce any of these risks. Your assets maintain their value long term, then.

Each situation is different. When you work with a professional, you’ll create a customized plan of action that applies to you based on the type of assets you own, their worth, how you plan to use those assets in the short and long term, and the types of risks they face.

What Asset Protection & Preservation Are NOT?

It is possible to protect assets from claims. However, it is not legal and never advisable to use any illegal means to protect such assets. Asset protection is not a form of tax concealment or fraudulent transfer. It does not involve hiding assets and is not a form of tax evasion. You will not be hiding your investments from bankruptcy courts either.

What Can I Do To Protect My Properties from the IRS?

Although you can’t hide what you own from the IRS, you can make changes to your ownership that will remove them from your personal portfolio. For example, the creation of an irrevocable trust allows you to transfer some of your property to the trust. The trust then is the owner of those assets. You no longer are.

In making such a transfer, you remove the property from your ownership and reduce your risks of having taxes levied against them. This can preserve the value of those assets long term. There are other strategies that may be effective, depending on the type of taxes as well as the current situation.

Should I Create an LLC for My Rental Property?

Limited Liability Companies, or LLCs, are a type of legal business formation. They’ve become a very popular way to protect real estate holdings. When property is placed under an LLC, it can reduce personal exposure to risks surrounding that property. There are also tax advantages in some situations.
When real estate is placed in an LLC, the property is treated as a business. It is no longer directly linked to the owner’s assets but is a standalone business. As a result, any lawsuits filed against the property, such as someone being hurt on the property, impact only the business, not the owner’s personal property and assets. On the other hand, if a property owner does not create such a business entity, his or her personal real estate can become accessible in a settlement from such a lawsuit.

Additionally, LLCs become separate, taxable entities. Depending on the type of real estate, its use, and its value, this can help to reduce some of the taxes the owner pays on that real estate.

How Can I Avoid Getting Audited?

Many individuals owning significant real estate or other valuable assets worry about audits. Audits can be painfully expensive if mistakes are found. To avoid them, individuals need to take proactive measures. At the heart of this is ensuring every tax form submitted is accurate and submitted without any details missing. There is no benefit to lying to the IRS. And, there is no need to do so if proper asset preservation and prevention methods are in place.

With those prevention tools will come protection for personal property. For example, the formation of an LLC means the LLC will report earnings separately as its own business. This creates an important separation for the business and the property owner. Should an audit occur, it impacts, in most cases, just the LLC. This helps reduce any significant result of that audit.

How To Create a Plan To Protect My Assets?

The ultimate first step is to work with a professional to assess your risks. It’s important to establish guidelines now for what your goals are including how you plan to use your assets as well as how you plan to protect them. It’s also important to consider a variety of methods for reducing your risks, which ultimately comes down to a very specific and customized plan for your needs.

Multiple asset protection strategies exist for real estate investors. Once you realize the liability risks that you face as a property owner, it becomes clear you need to take some action to address those concerns. There are options to consider.

An initial step some would take is to increase the amount of liability insurance carried. However, this is not a comprehensive solution. Rather, it becomes valuable to separate real estate assets from personal assets. With the creation of an LLC, it is possible to protect real estate from renters or other creditors who may try to sue for some reason. Business entities like this can shield assets and help to prevent losses in nearly all situations including creditors, lawsuits, and tax implications. Establishing this type of rental property asset protection now is critical.

What to Do Now?

This is just a basic overview of asset protection and asset preservation. It only provides some basic information because every circumstance and strategy is different. The fact is the process of protecting assets legally to protect against tax claims, to reduce tax liability, to shield property from lawsuits, and to minimize creditor claims is complex. There’s a lot on the line here. There’s no reason to risk your decisions or assets.

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