The old saying, “what you don’t know won’t hurt you,” does not apply to real estate law. Ignorance of the law is never an excuse. In the U.S., everyone is expected to know and follow the law, whether they are aware of it or not. For real estate owners, the legal landscape is full of potential pitfalls that could lead to significant financial losses.
This blog highlights common legal traps for real estate owners and advisors, emphasizing the importance of proactive legal planning.
Understanding Proposition 19: Property Tax Myths and Realities
Proposition 19 is often misunderstood, leading to mistakes that could cost real estate owners a lot of money in property taxes. While Prop 19 does provide some property tax benefits, especially for older homeowners, it’s crucial to know its limits.
The positive aspect of Prop 19 allows homeowners aged 55 and over to transfer their property’s low tax rate to a new home, but only if the new home’s value is equal to or less than their current home. If the new home is more expensive, this tax benefit will not apply.
When it comes to transferring property to heirs, the law is much stricter. Only children (or grandchildren, if the child is deceased) can benefit, and even then, only if the property was the parent’s primary residence and the heir moves in within a year of the parent’s death. Additionally, if the property’s value has appreciated beyond a certain point, a reassessment may still occur, increasing property taxes.
In short, Prop 19 is not a catch-all solution for keeping property taxes low when transferring real estate. Owners should consult with an estate planning attorney or tax advisor to fully understand how the law applies to their unique situation.
Protecting Real Estate from Lawsuits: The Role of LLCs and Trusts
Owning real estate comes with inherent risks, including the potential for lawsuits. Property owners are exposed to liability, whether from tenant injuries, accidents on their property, or personal legal matters unrelated to the property itself. While insurance can provide some protection, it is not always enough, as claims may be denied or damages may exceed policy limits.
To further protect real estate assets, many property owners use Limited Liability Companies (LLCs) or Irrevocable Trusts. These legal structures can shield the owner’s personal assets from claims related to the property. However, setting up an LLC or trust must be done correctly. Many owners mistakenly believe that setting up an LLC is a simple task, but failure to maintain it properly can lead to the legal “piercing of the corporate veil,” leaving the owner personally liable.
In California, LLCs offer limited protection. They shield the property from lawsuits related to the property itself, but if the owner is sued for personal reasons, their LLC’s assets can still be targeted. For this reason, many real estate owners opt to create LLCs in more favorable states, such as Wyoming, which offer stronger protections.
Why Primary Residences Usually Don’t Belong in LLCs
A common question among homeowners is whether to place their primary residence in an LLC. In most cases, this is not advisable. Doing so eliminates the homeowner’s capital gains tax exclusions, which allow for tax-free profits of up to $250,000 for individuals or $500,000 for couples when selling their home. These exclusions only apply to primary residences, and transferring a home into an LLC would disqualify it from this benefit.
Instead, primary residences are generally protected through homeowner’s insurance and umbrella policies, which are often more than sufficient. However, in some cases—such as high-value properties, or homes in areas where insurance is difficult to maintain—creating an LLC may still be worth considering.
New Compliance Rules Under the Corporate Transparency Act (CTA)
Real estate owners who have already established an LLC or other business entity must now comply with the Corporate Transparency Act (CTA). Under this new federal law, LLCs, corporations, and partnerships must report certain ownership information to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN).
Failing to meet the CTA’s reporting requirements can result in daily fines of up to $600, with a maximum penalty of $10,000, and even jail time. The deadline for entities formed before January 1, 2024, is December 31, 2024, and new entities must file within 90 days of their creation.
It’s important for real estate owners to understand that even if their LLC or corporation is considered “inactive,” they may still be required to file under the CTA. Owners should seek advice from qualified attorneys to ensure compliance with this new law.
Key Takeaways for Real Estate Owners
Real estate ownership, while rewarding, comes with significant legal obligations. From understanding the implications of Proposition 19 to protecting assets through LLCs and trusts, and complying with new laws like the Corporate Transparency Act, property owners need to stay informed and proactive.
Advisors such as estate planning attorneys, tax attorneys, and business law professionals play a crucial role in helping owners navigate these complex issues. For real estate owners, consulting with knowledgeable legal professionals is key to avoiding costly mistakes and ensuring long-term protection of their assets.
For more information or to discuss your real estate planning needs, contact Snyder Law, PC. Our experienced attorneys are here to help you protect your property and your financial future.
