All Forum Posts by: Stephen Hill

My wife and I are starting out with our first rental, and being rookies, want to be sure that we are insured to the hilt. We were hoping some of you guys could look over our situation and see if you had any suggestions.

Home was built in 1930, and appraises at around $40-$50K. Total replacement value is being quoted at around $110K. They will also do an ACV policy for about $100 a year less.

We are purchasing the property with an LLC, using our own assets / credit as a personal guarantee (there's just no other way). We are looking at "Rental Dwelling" insurance policies with $500K in liability coverage, $5K in Medical Payments, $4K for contents (even though we won't be living there, the company says that's the minimum). We're also planning on electing sewage backup coverage at $2,500.

We've also been told that tenants should be required to purchase renter's insurance, because any damage to the property caused by their negligence would not be covered under our policy. So, we'll make sure to do that.

Our LLC also owns some other properties (inexpensive vacant lots) that are owned 100%, with no property insurance. I know many people recommend holding each property in separate LLCs - which we may do in the future, but in the meantime, would obtaining a $1M umbrella policy cover liability on the vacant lots, as well as any extra liability on the rental home?

This issue of real estate dealer vs. investor has been brought up many times, but none of the forum questions I can find seem to address my particular situation. I understand that nothing said here constitutes official legal advice, but I thought I would get an opinion from some of you on how I should handle my particular situation.

1. My primary source of income/employment has nothing to do with real estate.

2. I purchase raw land as a hobby/investment - typically city lots with no structures.

3. No rents or installment contract payments are received.

4. I may decide to sell 2 or 3 of them a year, generally profiting less than $1,000 on each, after holding each property for at least one year.

Two questions: In your opinion, would I be subject to self employment taxes on the profits from the sale of these properties (considered a real estate dealer), or long-term capital gains (investor)? And, would forming a single-member LLC to hold title to these properties (for liability reasons) make the IRS more likely to consider me a dealer?

Thanks for your help!!