A person’s home is their castle, but how easy is it for someone to storm the castle? Legal protection of a personal residence is actually a big challenge. Most people don’t worry about it too much, but those who are active in real estate investing, own their own business, or are professionals with a liability exposure do worry. What can be done to protect your home from legal actions brought against the home owner(s)?
The knee-jerk reaction is to put the residence in an LLC or corporation. Placing a personal residence in a corporation is actually a substantial loss of asset protection for the residence. The corporation is designed to protect the owners of the corporation and their assets from liabilities incurred in conducting the business of the corporation. It is not designed to protect assets held by the corporation.
An LLC has similar drawbacks to the corporation, but it does have charging order protection which helps protect the assets held in the LLC from liabilities of the owners themselves. That actually sounds like the asset protection for a residence that we are looking for. In theory, your residence would have better asset protection if you held it in an LLC you owned. But there are a lot of drawbacks to placing a residence in an LLC.
A personal residence has protection under state laws. Florida and Texas actually have homestead laws that protect 100% of a personal residence’s value from the personal liabilities of the owners of the residence. All states have some sort of “homestead” acts, and these acts protect values in the home between about $60,000 and $200,000. However, when the home is owned in an entity, such as an LLC, it is no longer a personal residence. It is a commercial building when it is owned by an entity.
Note that a living revocable trust is not an entity which affects state Homestead Act protection, so don’t worry about putting your house into a living revocable trust. A living revocable trust also has no effect on your insurance or taxes.
However, putting a residence in an LLC or other entity does have a profound effect on your taxes and insurances. The property taxes on the property will go up and the insurance will go up. It isn’t uncommon to see a 300% increase in both the taxes and the insurance premiums.
Additionally, when you put a residence into an entity, you lose the tax advantages of owning a residence. A personal residence is one of the few tax shelters left in the code. There’s the interest deductions, sale of the property after you’ve live in it two of the last five years, and other benefits.
Watch my YouTube video above for a more detailed discussion of protecting your personal residence.