Asset protection is necessary for every real estate investor. Protecting what you have worked so hard for is ‘essential to a successful investment and future in real estate.
Beginning With Real Estate
If you are a beginning investor, it’s probably best to not worry about asset protection until you have a few assets to protect. Why spend time and money setting up a business entity and creating tax reporting requirements unless you need to?
Once you have assets and something to protect, then it’s time to set up your business structure. Question # 1: What is your net worth? Question # 2: Do you have assets that are at risk? If the answer to either of those questions is, “Yes,” then you need to take the next step.
Assuming you want to set up an entity for wholesaling properties, the most popular are an LLC (Limited Liability Corporation) or a C Corporation. There is much debate about which one is better, honestly it’s up to you and what works best for the assets that you hold. With an LLC, the income is passed through.
Taxes, Taxes, and More Taxes
Why is the tax issue such a big deal?
Here’s a simplified example. If you make $100K personally, you are taxed on the full amount (35%) and have $65,000 left. Anything you buy for yourself comes from after-tax dollars. However, with a C Corporation if you could make the same $100K on paper, but have $50K in allowable expenses that you can write off. So you get taxed on that $50K at 15% and only have to pay $7,500 in taxes compared to $35,000 on your income.
Asset protection is more than just a Series LLC, and can cover a wide range of things that you need done. It’s important to think ahead when you have assets in your name and growing your real estate empire.