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.
This information is for educational purposes only and does not constitute direct investment advice or a direct offer to buy or sell an investment, and is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation. Because investor situations and objectives vary, this information is not intended to indicate suitability for any particular investor. The views of this material are those solely of the author and do not necessarily represent the views of their affiliates.
Investing in real estate and 1031 exchange replacement properties may involve significant risks. These risks include, but are not limited to, lack of liquidity, limited transferability, conflicts of interest, loss of entire investment principal, declining market values, tenant vacancies, and real estate fluctuations based upon a number of factors, which may include changes in interest rates, laws, operating expenses, insurance costs and tenant turnover. Investors should also understand all fees associated with a particular investment and how those fees could affect the overall performance of the investment.
Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA). 1031 Capital Solutions is independent of CIS, CAM and CIA.