Legal Question in Real Estate Law in California

If the properties are already owned putting them into an LLC has virtually no advantages and usually has substantial tax disadvantages. You are correct that you would have to transfer the property to the LLC. That triggers tax consequences. If you have a loan on the properties that would also be an event of default, meaning you would have to either get a waiver, or more likely get the lender to refinance. That in turn would involve higher interest rates and a personal guarantee, which defeats much of the purpose of an LLC. Even if you are looking toward acquiring new properties, it is usually significantly more trouble and expense to set up an LLC than it is worth. It will make it harder to get loans and the interest rates will be higher. Even with a bare bones LLC you will incur attorneys fees unless you want to run the near certain risks of trouble down the road by trying to set it up yourself. And the liability protections you get aren't half as strong as some people will try to convince you they are. If you go without insurance, there is a good chance a good lawyer can pierce the LLC and get your personal assets anyway. If you have good insurance, why go to the expense of an LLC? The only time an LLC starts to make sense is if you will be investing in the property or properties with other people. At that point an LLC starts to make a lot more sense in that it provides a well recognized legal structure for managing the investment, allowing people to sell out and buy in without having to sell the property or do a full blown real estate transaction, or triggering capital gains and property tax reassessments. Bottom line: until you are ready to bring in investors, just own the property as an individual and get good insurance. It will protect you as well or better than an LLC for far less cost.

I disagree with the conclusion that the liability protection provided by the LLC is not always worthwhile, If you are investing in commercial property or property in a high risk area, the LLC protection is itself a good good catastrophic insurance. It is not a replacement for property insurance, so both should be used. Properly documented, the LLC provides the same protection a Corporation does for its shareholders. We make these determinations on a case by case basis after educating the client on the pros and cons and discussing their risk tolerance. Insurance does play a role, but is not always adequate protection. For an extreme example, if you have invested in a high risk property in South Central and rent to tenants, I would immediately place the property in an LLC. All of your other personal assets are at risk if you do not.

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