Keeping Your Privacy Private
Let’s assume you own several rental properties and want to have privacy of ownership and asset protection, however, you do NOT want to let the IRS see what you own when you report the income on your Schedule C at tax time. I am assuming you want to stay out of trouble with the IRS and do not want to avoid any taxes you owe, but do not want the IRS to know exactly what houses or LLC’s you own.
One possible solution might be to have one or more properties owned by one or more Invisible NM LLC’s which do not have your name recorded in the public records. At this point the LLC’s would hold the properties and you as the Manager control the LLC’s day to day operations so the ownership of the homes are now separated from you and your ownership is “private”.
Now if you are renting the properties and have them managed by a management company you will be getting a 1099-misc that will show your gross income for each property. They will need a social security number or EIN# to associate with that 1099-misc. Even if you manage the properties yourself you may still need to file a tax return for the income. You will still end up disclosing information that is better kept private. If you are like me you will want to be able to write off your expenses, depreciation, and property taxes before you pay any income taxes especially if it creates a loss against other income. In order to do this you need to fill in much of your “Private” information onto the IRS forms. Now you just lost part or all of that privacy and separation you wanted because you just gave all the info directly to the IRS. Banks and others that may get a copy of your tax return (when you try to get a loan for example) can now link you to your LLC and the LLC to the addresses of the properties held in your LLC’s. This is NOT good for your privacy and NOT good for asset protection either.
Is there a way to prevent this inadvertent disclosure of your holdings?
If you were to obtain additional “reporting” LLC’s that will be the only Member of a “holding” LLC you would in effect put an additional layer of privacy between you and the IRS or Banks. You could use the “reporting” LLC’s on your tax forms to report the pass-thru income, to open checking accounts, deposit rent checks, and other visible activities on your rentals inside of the “holding” LLC’s. Yes the IRS and Banks can see the reporting LLC’s but they can’t determine that they are members of the holding LLC’s. Also your name is not on any of the LLC’s in the public records so they can’t link you directly to them that way. You would of course want to keep all the Operating Agreements, which is where this information is all disclosed, safe and sound under lock and key! Of course there are other arrangements that will be better for specific purposes but this should give you a glimpse of some of the things that are possible.
If you have other ways to keep your assets hidden and your identity private using similar creative arrangements let me know. I would love to share this information with others that are looking for information on HOW to design their Asset Protection Portfolio. I have noticed that there is a lot of general information about LLC use with Real Estate but not a lot of specifics on how to structure them for real world privacy and protection.
The below diagram should help clarify the above discussion.
Disclaimer: I do not give legal or tax advice. The preceding information is offered only as a point of view. You are encouraged to evaluate this information and act according to your own research and conclusions. Because I encourage independent thought and personal responsibility, I do not accept credit nor liability for the use or misuse of this information.