Quite often, I have a discussion with a client about potentially transferring their investment property (i.e., a house or condo) into an LLC, for asset protection purposes. This may make sense, but many people have misconceptions about the pros and cons. Here are three points to consider:

  • Yes, if properly done, transferring your investment property to an LLC could offer liability protection for risks associated with owning the property and renting to tenants. However, it will not insulate you from your own bad acts. For example, suppose you take it upon yourself to install a new ceiling fan. You install it carelessly. A few days later it falls on your tenant’s head, causing a permanent brain injury. Your tenant probably has legal claims against your LLC as the owner of the premises. Your tenant also has legal claims against you personally, because you installed the ceiling fan. The LLC will not protect you from your own negligence, even if you were acting on behalf of the LLC.
  • In the likely event that you have a mortgage, be careful about quitclaiming the property to an LLC. The mortgage will have a “due on transfer” clause that gives the lender the right to call due the entire outstanding balance if you convey away the property, even to your own LLC. I believe it is rare for a lender to exercise such right, but it is still best to get the lender’s permission before transfer.
  • Creating a simple LLC and transferring your investment property into that entity will not necessarily shield that investment property from your own creditors. The creditor could obtain a “charging order” that would prevent you from getting any distribution from the LLC – all would go to the judgment creditor until the judgment is satisfied. In the case of a single-member LLC, the creditor may obtain your LLC interest by “foreclosing” on it, depending on your jurisdiction. In Colorado, a creditor probably could do that.

The above are just a few considerations. Whether it makes sense to hold your investment property in an LLC depends on your situation.

Photo of Jeffrey Cullers Jeffrey Cullers

Colorado Dirt Law is maintained by Jeffrey Cullers, an attorney in northern Colorado. I completed my J.D. in 2008 at Southern Methodist University in Dallas, Texas. After briefly practing in Texas, I moved to Denver, Colorado to study natural resources and environmental law…

Colorado Dirt Law is maintained by Jeffrey Cullers, an attorney in northern Colorado. I completed my J.D. in 2008 at Southern Methodist University in Dallas, Texas. After briefly practing in Texas, I moved to Denver, Colorado to study natural resources and environmental law at the University of Denver Sturm College of Law, obtaining an LLM in 2010. I then practiced at law firms in both Colorado and Wyoming, focusing on property rights, federal land issues, and litigation. In 2015, I joined Herms & Herrera in Fort Collins, Colorado. Herms & Herrera is now Herms & Cullers. I have significant experience with easement and access disputes, homeowner association issues, and complex civil litigation.

Since I am a Colorado attorney, Colorado Dirt Law seeks to provide information and commentary regarding Colorado property right matters specifically, however, national matters and trends may come up as well. My passion for this practice area originates in the belief that strong private property rights, supported by a strong legal system, are essential to a free and economically productive society.

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