How can I limit liability for my rental property?


Q:  I used my VA home loan to pur­chase a 4-unit build­ing, and I cur­rently live in one of the units. I recently accepted a job with a gov­ern­ment agency that will require relo­ca­tion. I will most likely rent out the unit I am liv­ing in and have a prop­erty man­ager man­age my 4-unit build­ing while I am gone, but I am con­cerned about my per­sonal lia­bil­ity with regards to the build­ing. Is there any way to trans­fer the VA home loan prop­erty to an LLC (or other legal entity) in order to pro­tect myself from legal lia­bil­ity?
–Matt, Illi­nois


A:  Safety first! Or in this case, look out for your finan­cial wel­fare by map­ping out a strat­egy to pro­tect your assets and future income.  That’s a good idea.

There are a few dif­fer­ent ways to get that done, but I think you’ll have to con­sult with your lender (on your abil­ity to trans­fer your loan to another entity) and legal coun­sel (to review strate­gies, trusts, LLCs, etc.) to fig­ure out what your options are and what will work best in your sit­u­a­tion.  In the mean­time, here are a few gen­eral thoughts on the subject.

Lia­bil­ity insur­ance.  The rental or fire pol­icy that you will have on what will be your rental prop­erty typ­i­cally comes with some level of lia­bil­ity cov­er­age to pro­tect you in the event some­thing hap­pens and a law­suit ensues.  You may be able to increase your lia­bil­ity lim­its on that pol­icy or add an umbrella pol­icy.  In either case, you would, in a rel­a­tively inex­pen­sive way, build a big­ger wall between a poten­tial law­suit and your finan­cial well being. Check with your insur­ance car­rier to review your options.

Trans­fer issues.  Your abil­ity to trans­fer your prop­erty to an LLC will hinge on your lender’s will­ing­ness to allow you to do so.  That being the case, you should dis­cuss your options with your cur­rent lender.

Review all your options.  An attor­ney could help you eval­u­ate and imple­ment a vari­ety of asset pro­tec­tion strate­gies.  For exam­ple, he or she could review the via­bil­ity of set­ting up a grantor trust for the prop­erty as a mech­a­nism to be able to trans­fer it into an LLC.

Your con­cern about lia­bil­ity issues is well founded, now, in con­sul­ta­tion with your advi­sors, you just have to fig­ure out what approach you want to take to limit that lia­bil­ity.  Good luck.


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Examples given are hypothetical illustrations and not an indication of the benefits or features of any USAA product. You should seek policies and advice based upon your own particular circumstances. Sample loans are for illustration purposes only and are not a rate quote, pre-approval, or commitment to lend.

Scott Halliwell and JJ Montanaro are CERTIFIED FINANCIAL PLANNER™ practitioners with USAA Financial Planning Services, one of the USAA family of companies. Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and Certified Financial Planner™ in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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