Why Most Arizona Investment Real Estate Should be Held in an Arizona Limited Liability Company

Two Primary Asset Protection Rules for Real Estate Investment

by Richard Keyt, Arizona LLC, business & real estate attorney

If you own Arizona investment real estate in your name, rather than through an entity such as an limited liability company, corporation or limited partnership, all of your assets and life savings are at risk and could be lost to a creditor if a problem occurs with the property. Because the LLC is the entity of choice today for holding title to real estate, the corporation and the limited partnership are infrequently used in Arizona to hold title to real estate.

Owning real estate for investment, especially residential and commercial real estate is inherently risky. Accidents happen. People can get hurt on the property. When people are injured or killed on property that does not belong to them, the injured victims and family members of deceased victims frequently sue the property owner for damages.

Insurance is the first line of defense to protect against claims arising from the property, but judgments can exceed the amount of insurance coverage and sometimes insurance coverage is denied. For example, if you have a $2,000,000 general liability policy and an injured tenant obtains a judgment against you for $3,000,000, you have a $1,000,000 problem that could have been avoided if your property were owned by an LLC rather than by you in your name.

When your Arizona LLC holds title to real estate and the worst case scenario occurs and the court awards the multi-million dollar judgment in favor of the plaintiff, the defendant will be the LLC instead of you and the creditor should only be able to collect the judgment from the LLC’s assets. Your assets should be protected. You may lose your entire investment in the property owned by the LLC, but the rest of your assets should be safe. The cost to form an Arizona limited liability company to hold title to your real estate is insignificant compared to the money and time most people invest in their real estate.

Two Primary Asset Protection Rules for Real Estate Investment

Asset Protection Rule Number 1. Buy as much insurance as you can afford to insure all of your LLC’s real estate and business activity. Make sure you have written proof of insurance showing that the LLC is a named insured. If you transfer real property to your LLC, but do not obtain insurance naming the LLC as an insured, the insurance company will probably deny coverage.

Asset Protection Rule Number 2. Form an LLC to hold title to your real estate so that if a lawsuit occurs, the LLC will be the defendant rather than you. This is the key to real estate asset protection. If you own the real estate, all of your assets are at risk. You must transfer title to the real estate to your LLC to reduce the risk you will be named as a defendant in litigation arising from the real estate.

Corollary to Asset Protection Rule Number 2. You have to actually sign a deed conveying the real estate to the limited liability company and record the deed in the county in which the real property is located. It is a waste of time and money to form an LLC to hold title and never deed the property to the company because you continue to own it and will be the defendant in a lawsuit.

Caveat Number 1. Even if you form an LLC and transfer the real property to the LLC, you will remain liable for your conduct. For example, if your LLC owns a rental home, you install a new water heater in the home, the water heater blows up and a tenant is killed or injured, you will be sued because you are the person who caused the harm by improperly installing the water heater.

Caveat Number 2. To avoid being sued after you form your LLC (see Caveat Number 1 above) eliminate or minimize action with respect to the LLC and its property that creates a risk that you will be sued. You have less risk of being sued when the water heater needs replacing if you hire a good plumbing company to do the job instead of doing it yourself.

For information on a related topic, see my article entitled “How Many LLCs Should I Form for My Properties?

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If you have questions about forming an Arizona LLC, contact Arizona LLC lawyers Richard Keyt (ext. 1) or Richard C. Keyt, JD, CPA, (ext. 3) at 602-906-4953.  We do not charge for entity formation related questions.

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