How to Protect Real Estate from Creditors in Florida

Protecting Real Estate from Judgments

Real estate asset protection is the legal process of structuring property ownership to make it difficult for a creditor of the individual owner or a business entity to reach the property.

Successful investing in Florida property has enriched individual investors for several generations. Individuals in Florida and elsewhere hold substantial equity in Florida real property. Judgment creditors quickly target their debtor’s real estate ownership; a recorded judgment is automatically a lien on all non-exempt real property the debtor owns in Florida. Asset protection of Florida real estate entails planning ownership of rental and commercial real estate properties to protect the properties from collection by a judgment creditor.

The best time to protect real estate is before taking title to the property. The real estate investor may designate how they will title the property before closing the purchase contract. Smart ownership titling is the key to real estate asset protection.

Here are the main ways to protect real property from creditors:

  1. Homestead exemption, if applicable.
  2. Transfer property to an irrevocable trust.
  3. Create a limited liability company and transfer property to it.
  4. Use tenancy by the entirety for married couples.

Rental Property Asset Protection Strategies

Many individual investors take title to their initial investment property in their own names, or jointly with their spouse. Individual ownership is the simplest way to own real estate, and the mortgage lender sometimes prefers that mortgaged property be owned in the borrower’s individual name. Titling property in the name of the individual investor is efficient and simple. The individual owner claims directly on their personal tax return the tax benefits of depreciation and other expenses. There are no fees involved in establishing a legal entity or preparing annual entity tax returns.

Titling investment real estate in the owner’s individual name(s) provides no asset protection. The individual owner is liable for any claims asserted by a property tenant, ownership partner, government agency, or subsequent buyer. Individually owned property is exposed to judgments against the owner arising from the owner’s financial debts and business activities unrelated to the real estate investment.

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Corporate Shield for Real Estate Asset Protection

Ownership of property through a separate legal entity provides a better legal shield against liability from property ownership. A money judgment related to property ownership will expose only the real property held in that particular entity. The judgment will not jeopardize real property owned by different legal entities, nor will the judgment threaten the individual owner’s personal assets, such as their personal financial accounts or operating businesses. The protection a legal entity affords for the owner’s personal assets is commonly referred to as a “corporate shield.” There are three business entities that typically are used to own investment real estate and provide a corporate shield: corporations, limited partnerships, and limited liability companies.

A Florida corporation, partnership, and limited liability company (LLC) each provide a “corporate shield” that protects the individual owner and their personal assets from liability related to real estate ownership. Florida law makes it difficult for a claimant to pierce the corporate shield. The claimant must show that the owner established the defendant legal entity to defraud creditors or operated the entity in a fraudulent manner. That the entity operates as the owner’s “alter ego” is not sufficient grounds to pierce a corporate shield.

Using Entity Ownership for the Owner’s Asset Protection

There are significant differences in the ability of different legal entities to protect the individual’s ownership interests in a particular property investment from civil judgments against the owner from activity unrelated to the real estate property.

When an owner holds legal title to the investment property in a corporation, the individual’s investment is evidenced by common stock in the owner corporation. Corporate stock is vulnerable to judgment creditors. A judgment creditor can levy on the owner’s stock, acquire stock ownership and control over the corporation, and then liquidate the corporation’s real estate to pay the judgment. A court can order to issue replacement stock and give replacement certificates to the judgment creditor if a judgment debtor has misplaced corporate stock certificates.

LLCs and limited partnerships provide better asset protection against creditors holding a personal judgment against the individual real estate investor. A judgment creditor cannot levy upon a debtor’s LLC membership interest, and the creditor cannot obtain a lien on the real estate owned by the LLC. Florida law provides that the judgment creditor’s sole and exclusive collection remedy is a charging lien on LLC distributions made to the real estate owner who owns the LLC membership interest. Most real estate investments do not produce significant positive cash flow, especially in the early years. Without positive real estate cash flow, there are small amounts, if any, of LLC cash available to be distributed to the owners, and the creditor gains no money from the charging lien.

With a properly drafted asset protection operating agreement, the individual Florida real estate investor acting as LLC manager controls the amount and frequency of cash distributions. If the LLC does not distribute cash flow, then the cash flow and real estate remain protected inside the LLC.

The LLC protection described above applies only when there is more than one LLC member. A judgment creditor may levy upon and thereby take over the investor’s 100% membership interest of a single-member LLC. A second investor in an LLC or partnership must have a significant ownership percentage to make the LLC multi-member.

Limited partnerships provide comparable asset protection because Florida law makes the charging lien the sole creditor collection remedy for the debtor’s partnership interest. The law makes no distinction between partnerships with one limited partner or multiple limited partners.  Investors generally prefer LLCs over limited partnerships because the LLCs are more cost-efficient to set up and operate.

How to Protect Real Estate from Creditors

Asset protection is an essential strategy for safeguarding your real estate investments from potential creditors. Here are some commonly used strategies to protect real estate from creditors:

  1. Homestead Exemption: Many jurisdictions provide a homestead exemption that can protect a certain amount of the equity in your primary residence from creditors.
  2. Liability Insurance: Maintaining adequate insurance coverage can help protect your real estate assets from creditors, especially in the case of properties that can expose you to potential liability, like rental properties.
  3. Equity Stripping: Also known as “equity skimming,” this is a method where you pull out the equity in your property via loans and other borrowing methods, making the property less attractive to creditors. However, this strategy has potential legal pitfalls and should not be used to defraud creditors.
  4. Titling Assets Correctly: How your real estate is titled can have an impact on its vulnerability to creditors. Joint tenancy, tenancy by the entirety, and certain forms of trusts can offer some degree of protection.
  5. Use of Legal Entities: Forming a corporation, limited liability company (LLC), or limited partnership to hold your real estate can protect these assets from personal creditors. However, this strategy has tax implications, and the protection it offers depends heavily on the laws of your jurisdiction.
  6. Asset Protection Trusts: Some jurisdictions allow for the creation of trusts that can protect your assets from future creditors. These are typically irrevocable trusts, which means you give up control of the assets placed in the trust.
  7. Bankruptcy Protection: If you are facing significant creditor pressure, bankruptcy may be an option. While this is often viewed as a last resort, certain types of bankruptcy can allow you to keep your home and other assets while you work out a repayment plan with your creditors.

Lease Rights

People typically do not think of a lease as an asset because the lease represents a monthly payment and a large liability. Yet, a lease is also an asset because it gives your right to use or occupy property so long as you make payments. A good lease can be quite valuable. For example, let’s say you have leased a new Mercedes for $200 a month for four years. That lease is an asset because your right to drive the Mercedes for the next four years for only $200 is a valuable right. If the lease payment were $1,000 per month then the lease would have no inherent value for most people.

Property leases are valuable regardless of the amount if the leased premises is used for your business. Your right to occupy the business property, and your leasehold improvements, are valuable because the lease is required to operate the business. An astute creditor will levy upon a property lease in order to close the doors to the debtor’s business. Even though the creditor would have to make future lease payments, the attack upon the debtor’s leases pressures the debtor to pay.

Lease valuation is also important when a debtor wants to sell or transfer business assets to another business or another business owner. The value of existing business leases must be determined by appraisal and then included in the transfer price in order to defend the fair value of the business asset sale.

Tax Planning

Federal income tax planning for real estate investment is independent of the choice of ownership entity. The IRS permits LLCs and corporations to choose how they want to be treated for tax purposes. The IRS default treatment for LLCs and limited partnerships is partnership taxation. An LLC can affirmatively elect to be treated as a C corporation or an S corporation for income tax purposes. Today, most real estate investors choose to own Florida real property in multi-member limited liability companies taxed as partnerships or S corporations.

Gideon Alper

About the Author

I’m an attorney who specializes in asset protection planning. I graduated with honors from Emory University Law School and have been practicing law for almost 15 years.

I have helped thousands of clients protect their assets from creditors. Before private practice, I represented the federal government while working for the IRS Office of Chief Counsel.