Using a Single Member LLC to Protect Your Home

This post is in: Real Estate

5-14-1I talked earlier in the week about homesteads as an inexpensive and efficient way to protect some or all of the equity in your home. But there are other alternatives, too. Today I want to take a look at how a Single Member LLC can be effectively used to provide asset protection.

LLCs give us asset protection through the laws of each state, that say creditors may not generally attach or seize a debtor’s assets where those assets are held in an LLC (as long as the LLC has nothing to do with the debt or lawsuit at hand). So in a situation where you’re being sued personally for something, or you’ve got a business that is in trouble, it’s an effective way to keep your home and other personal assets out of the way of those claims.

A Single Member LLC is an LLC with one member, which has elected default tax status. In this instance that tax status is called “disregarded,” which means sole proprietorship. If you were running a business or renting out a property, that means any income/expenses would be reported on a Schedule C or E on your personal return. But because there is no business or rental going on here, there isn’t anything to report. Essentially this is a set-it-and-forget-it strategy. Set up the LLC, transfer the property, and forget it (except don’t forget to keep your LLC up to date with the state registry!). This strategy works for singles and married couples, as long as they file a joint tax return. The IRS considers a married couple to be a single individual where they file a joint tax return.

5-13-2Even though the home is in an entity, its disregarded tax status means that you still keep all of the tax deductions associated with home ownership. Plus, because the LLC isn’t doing business and isn’t required to file a tax return, you don’t necessarily have to file the LLC in the state where you live. This means residents of high-fee states (California and Maryland, for example, charge LLCs $800 + $500/year respectively) can shop for a cheaper jurisdiction, like Nevada or Wyoming, and form the LLC there.

A couple of cautions before you proceed. First, you may have some transfer tax when you retitle the property into the LLC. Even though there isn’t really a change in ownership (you still are the beneficial owner), some states still look at the transfer as a 3rd party sale and subject to tax. That’s definitely something to check out first. If it’s going to cost thousands to transfer the home, then this strategy may not be for you.

5-13-3Second, this strategy isn’t designed to protect against personal bankruptcy. You can’t simply throw your assets into an LLC and then declare bankruptcy, figuring that a trustee can’t get at your stuff because it’s protected. That issue was litigated in Colorado and the debtor lost. Also, this strategy won’t protect you from claims by the IRS or the mortgage holder. But it should give you some protection from third party creditors, and those who think you’re worth taking a run at because it looks like you’ve got a nice asset portfolio and can afford to defend or pay off a frivolous claim.

Third, remember that once the LLC is set up, you will need to keep it up to date. If you form the LLC outside your state, you will have a resident agent fee, and perhaps a small annual report fee. You can keep those costs quite minimal though, with careful selections in state and resident agent service. Overall, I think it could be some great peace of mind for a very reasonable price.


  1. sue says:

    If an llc is used for primary res. and then sold, would the 500K exclusion (married) still be avail?

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