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KASS: Using an LLC to take title of investment property

Q:     My husband and I plan to buy an investment property, and we want to make sure our other assets are protected. What is the best way for us to take title? Emily.

A:     Dear Emily, I cannot provide specific legal advice. However, in general, there are three ways in which title can be held.

First, individually, in the names of you and your husband. That provides the least protection. Even if you have more than adequate insurance – including umbrella coverage – there is always the possibility that your other assets can be grabbed. For example, a court judgment exceeds the insurance limits; or the insurance carrier declines coverage for reasons spelled out in the insurance policy.

Next, you can take title in the name of a corporation. Talk with your financial advisors about this approach; from my experience, there is too much paper work and corporate filings required to make this a favorable option.

Next, you can take title in the name of a limited liability company (LLC). Although I don’t normally make recommendations, this is what I generally suggest to my investor clients. The LLC provides the same protection as if it were a corporation but with less complications and less paperwork. Oversimplified, it is called a “pass through” entity; the LLC files an information tax return but the profits or losses are “passed through” and you include those numbers on your individual tax returns.

Every project is different; review these alternative but discuss with your financial and legal advisors. And the recent tax proposals submitted to Congress by the President seem to favor “pass-through” legal entities, as we all know, Congress has the final say.

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Q:   What is the statute of frauds? I had (or thought I had) an agreement with a friend but was just told that it cannot be enforced because of that statute? Brad.

A:     Brad, many of the laws here in the United States stem from English law, and the statute of frauds is one of them. Oversimplified, oral contracts for the purchase or sale of real estate – or leases for more than one year – are not enforced. Why? We have all heard the expression “he said, she said.” According to one judge, the requirement that everything be in writing is to “guard against perjury and protect against unfounded and fraudulent claims.”

Like a lot of things in the law, there are a few exceptions to this statute. First, if a party to an oral agreement can prove that she reasonably relied on an oral statement by the other party to her detriment. This is known as the doctrine of equitable estoppel.

A second exception is where there is partial performance of the terms of the oral agreement. An example would be where X orally agreed to buy a house from A, and gave A a $5000 check as a deposit which A cashed.

And a third exception is where the opposing party admits – by his actions or his words – that there is a contract.

There is – or should be – language in every real estate contract that reads:

“This contract, unless amended in writing, contains the final and entire agreement of the parties and the parties will not be bound by any terms, conditions, oral statements, warranties or representations not herein covered.”

So, bottom line: If you believe you have reached agreement with someone on a real estate transaction, put it in writing and have it signed by all parties. While probably not necessary, you may also want to have the signatures witnesses by an outsider – or even notarized.

 

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