Your clients who own rental property expose themselves—and their assets—to a world of potential legal liability beyond mere home ownership. It is possible to mitigate this risk by holding title through business entities (LLCs, corporations, irrevocable trusts, etc.) and purchasing insurance policies, though the latter can often encourage, rather than deter, litigation. Even if one can protect his or her personal assets, litigation itself can be highly damaging to both the wallet and psyche. Individual owners of investment property will be the target of any property-related lawsuit, regardless of whether they hold title in an LLC or have excellent insurance. Even in victory, the cost of successfully defending a lawsuit can be financially devastating.

Today there are three particularly worrisome categories of possible landlord exposure: fair housing laws, premises liability and mold. Unquestionably, there can be no tolerance for an owner who purposefully seeks to discriminate against any class of prospective tenants.  However, well-intending landlords can easily trip over these rules, which are designed to make it easy for tenants to make and pursue their claims. With regard to premises liability, states like California now promote the legal principle that liability for injuries should be imposed disproportionately on landlords, who are viewed as most able to implement steps that promote social welfare. And mold hysteria (driven by media reports of legitimate mold cases) has triggered an explosion in two separate industries: mold remediation and mold litigation.

What can individual landlords in states like California and Oregon do to counter these threats? One answer is to sell their property, conduct a 1031 exchange and invest in passive replacement programs, preferably out of state.  If you are not already talking to your clients about alternative real estate ownership options, you should start.  

The contents herein constitute neither an offer to sell nor a solicitation of an offer to buy any security, which can only be made by prospectus.  Investors should understand all fees associated with a particular investment and how those fees could affect the overall performance of the investment. Neither 1031 Capital Solutions or its representatives, nor DFPG Investments, LLC provide tax or legal advice, as such advice can only be provided by a qualified tax or legal professional, who all investors should consult prior to making any investment decision.