Should we switch properties to LLC?

[Elizabeth Jackson]

Hey all! I'm looking for some input. We currently own 3 rental properties across Texas, Virginia, and Washington State. They were all originally Owner occupied and then turned into rentals when we moved. I'm wondering if we should transfer them to a LLC to protect ourselves for if/when lawyers come a'knockin. Few questions: Does landlord insurance protect us enough? Will we lose our homestead exemption if the title is transferred? Does a LLC have to be formed in each state? Since a LLC is a pass through entity, can we use that income still to qualify for our next property as long as it's on our tax returns? In general, is it worth it?

Thank you in advance for your help!!

[Michael Plaks]

1. Does landlord insurance protect us enough? This is an endless dispute - search this forum, and you will find dozens of threads, all very similar. Keep in mind that anyone who is not an attorney (I'm not one) is NOT qualified to answer this question. Answers along the line of "I did this, and I never had a problem..." are useless. They are similar to "I speed all the time, and I have no tickets."

2. Will we lose our homestead exemption if the title is transferred?  You are not entitled to a homestead exemption if you no longer live there. If these 3 properties are under homestead, you're essentially cheating and simply have not been caught yet. Transfer to an LLC will make it obvious, and you will probably lose it. Again, more of an attorney question.

3. Does a LLC have to be formed in each state? If your attorney does recommend LLCs, then they need to be recognized by the state where the property is, or you have no protection (I believe, not being an attorney). It either means an LLC created in that state or an out-of-state LLC registered with the state as a "foreign entity." The former is usually cheaper. A separate question for your attorney is whether to form 3 LLCs, one LLC or one Series LLC.

4. Since a LLC is a pass through entity, can we use that income still to qualify for our next property as long as it’s on our tax returns?  It is usually not set up as a pass-through entity but as a disregarded entity. This means that your tax return looks exactly the same as if there're no LLCs involved. Most lenders will disregard it, as well.