Owning rental properties can be profitable but can also present potential risks. These risks come in the form of potential lawsuits by tenants as well as other creditors.
The risk of a lawsuit by a tenant is easy to understand. If a tenant is somehow injured on the property, they will most likely sue the landlord.
Investment properties can be subject to lawsuits by other creditors because they are not protected by Nevada’s homestead law. Under Nevada homestead law, many classes of assets are automatically protected from creditors. For example, each Nevada resident can file a homestead on their primary residence and protect up to $550,000 of equity. The homestead protection also applies to annuities (unlimited protection), cash value life insurance (unlimited protection), and retirement plans up to $500,000 (ERISA protected plans have unlimited protection).
Since investment rental properties aren’t covered by any homestead laws, people want to know what they can do to protect this class of asset. One of the easiest ways to add a layer of protection to rental properties is to transfer your ownership into a limited liability company (LLC).
In Nevada, LLCs are easy to set up and maintain. Compared to many other states, the annual filing fees and operating costs are significantly lower. However, the really great thing about Nevada LLCs is that they provide a strong layer of protection to assets – such as investment properties – that could otherwise be sought by a creditor.
Under Nevada law, the sole remedy of a judgment creditor is a “charging order” – which is essentially a lien. This means that a judgment creditor cannot take the LLC ownership interest, nor can they take the property in the LLC or force the LLC to make a distribution. The judgment creditor just gets a lien against any distributions which are made out of the LLC. The “charging order” protection can become a powerful leveraging tool if ever faced with a creditor.
Further, under Nevada law the “charging order” protection even applies to single member (single owner) LLCs. Thus, this makes the Nevada LLC a great tool to protect investment properties owned by one owner or by a married couple.
In addition to investment properties, LLCs can also be used to protect other assets not covered by the homestead law.