Posts in: December

How the New GOP Tax Law Affects Owners and Investors of Real Estate

December 28, 2017 Business planning, Real Estate, Small Business, Tax Planning Comments Off on How the New GOP Tax Law Affects Owners and Investors of Real Estate

Real estate has always been a major step in achieving the American dream and so there was plenty of concern within the industry that major changes in the taxes affecting owners and investors of real estate would negatively impact the industry and the tax benefits of owning real estate.   While the final tax changes are expected to diminish the tax benefits for some owners such as:  homeowners who take out mortgages above $750K, homeowners using home equity lines of credit, or homeowners in certain markets with high state tax, the overall impact on real estate, in our opinion, is likely to be nominal.   Below is a summary of the current laws and changes to the tax laws affecting owners and investors in real estate.

State and Local Tax:

Prior Law:

Individuals who itemize their deductions can claim deductions for specific state and local taxes including real property taxes, state income taxes, and sales taxes.  Property taxes incurred in connection with a trade or business can be deducted from adjusted gross income without the need for itemizing.

New Law:

Individuals who itemize (which will likely decrease in light of the increase in standard deductions) are allowed to deduct up to $10,000 ($5,000 if married filing separately) for any combination of (1) state and local property taxes (real or personal), and (2) state and local income taxes.  Prepayments on state income taxes in 2017 for future tax years may not be deducted.

However, state, local and foreign property taxes or sales tax may be deducted when incurred in carrying on a trade or business or for the production of income (reported on Schedules C, E or F).

Conclusion:  Generally worse for Taxpayers who itemize and pay high state and local taxes.

Mortgage Interest:

Prior Law:

Individuals may deduct mortgage interest up to $1M ($500K if married filing separately) of home “acquisition indebtedness”  (secured debt to acquire, construct or improve) on their principal residence, and one other residence of the taxpayer which can include a house, condo, cooperative, mobile home, house trailer, or boat.

Individuals with Home Equity Lines of Credit (HELOCs) were allowed to deduct interest paid on up to $100K ($50K if married filing separately) of a Home Equity Line of Credit.

New Law:

For homes purchased after December 15, 2017, the deduction for 1st home mortgages would be limited to interest paid on mortgages up to $750K ($375K for married filing separate) and is not limited to only your principal residence.  For refinances, the refinanced loan will be treated the same as the original loan so long as the new refinanced loan does not exceed the amount of the refinanced indebtedness.

The deduction for interest on Home Equity Lines of Credit has been eliminated which applies retroactively.  However, the new tax law did not modify the definition of “acquisition indebtedness” and so interest on a Home Equity Line of Credit that was used to “construct or substantially improve” a qualified residence continues to be deductible.

Conclusion:  Worse for Taxpayers since the qualifying indebtedness was reduced from $1M to $750K for debts incurred after December 15, 2017, and indirectly due to the increase in standard deduction plus the elimination of deductions of home equity lines.

Depreciation of Real Estate:

Prior Law:

The cost of real estate “used in a trade or business” or “held for the production of income” must be capitalized and deductions made over time through annual depreciation deductions over 39 years (for non-residential) and 27.5 years (residential) using straight line depreciation.

Certain leasehold improvement property, qualified restaurant property and qualified retail  improvement property can be depreciated over 15 years.

New Law:

Same recovery period for residential rental real estate and non-residential.  However, the previous exceptions for qualified leasehold improvements, qualified restaurant property and qualified retail improvement have been modified and consolidated so that they each must meet the definition of a “qualified improvement property” which is then depreciated over 15 years.

Conclusion:  Nominal change

Capital Gains:

Current Law:   Capital Gains rates apply to any net gain from the sale of a Capital Asset or from Qualified Dividend Income.   Capital Gains and Qualified Dividend Income are subject to rates of 0%, 15% or 20%.  Any net adjusted capital gain that would otherwise be subject to the 10% or 15% income rate is not taxed.   Any net adjusted capital gain that would otherwise be subject to the rates between 15% to 39.6% income rate are taxed at 15%, and amounts taxed at 39.6% income tax rate are taxed at 20%.

New Law:  No change in structure, except that the income tax brackets are modified and the amounts subject to these rates will be indexed for inflation based on the Chained Consumer Price Index (C-CPI-U) beginning the end of 2017.  For 2018, the breakpoints would be as follows:

Under $77,200 (married filing jointly) or $38,600 (single) of income, no capital gains

15% Rate:            From $77,400 married filing jointly ($38,700 for single)

20% Rate:            From $479,000 married filing jointly ($425,800 for single)

Conclusion:   Generally better for investors due to the new tax brackets and indexing for inflation.

Exclusion on Gain on Sale of Personal Residence.

No change.  The rule allowing for an exclusion from capital gains in the amount of $500K married ($250K single) for sale of the personal residence used as such for two out of the last five previous years remains.

1031 Exchanges:

Current Law:  No gain or loss is recognized if property held for productive use in a trade or business or for investment is exchanged for like kind which is held for productive used in a trade or business or for investment.

New Law:  For transfers after 2017, gain deferral allowed for like kind exchanges of real property only, but real estate held primarily for sale (i.e. flips) would not be eligible.   This applies to exchanges completed after December 31, 2017.  However, so long as the relinquished property is disposed of prior to December 31, 2017, the non-recognition provisions of the prior law applies.

GOP Delivers Tax Reform for Christmas – Joy to the World for Individuals?

December 28, 2017 Tax Planning Comments Off on GOP Delivers Tax Reform for Christmas – Joy to the World for Individuals?

Well, folks – it’s finally here.  Congressional Republicans spent most of the fall crafting, arguing over, and adding and deleting provisions from a sweeping tax reform bill, and President Trump just signed it into law (and held up his huge signature to the cameras).  It’s the first significant legislative achievement of The Donald’s presidency and the first major overhaul of the tax code since 1986.  Also, just like Obamacare in 2010, the new tax law passed without a single vote from the minority party.  In contrast, the 1986 tax law passed with a simple “voice vote” in the House, and by a 97-3 majority in the Senate – results that can only be attributed to a long-forgotten and apparently outdated concept called “bipartisanship.”  I had to Google it – 21st Century lawmakers may want to think about doing the same.

Immediately after signing it, the President had the new law shipped to the North Pole to be loaded onto Santa’s sleigh and delivered to all Americans (both naughty and nice) just in time for Christmas.  He had to send it FedEx because the U.S. Postal Service couldn’t guarantee on-time delivery (#Sad).  Anyway, whether waking up to find the revised tax code in your stocking on Christmas morning made you feel like you got a brand new iPhone X or just a gigantic lump of government-issued coal will depend on several factors.  My job is to go through how those factors will affect individual taxpayers, so you can decide whether to drink a little more egg nog to celebrate your tax windfall, or to spend New Year’s Day plotting how to tell President Trump and Congressional Republicans: “You’re fired!!!” as soon as possible.

Tax Brackets

First, tax rates go down for all taxpayers.

Income Tax Rate Filing Type
2017 2018 Single Married-Joint
10% 10% $0-$9,525 $0-$19,050
15% 12% $9,525-$38,700 $19,050-$77,400
25% 22% $38,700-$82,500 $77,400-$165,000
28% 24% $82,500-$157,500 $165,000-$315,000
33% 32% $157,500-$200,000 $315,000-$400,000
33%-35% 35% $200,000-$500,000 $400,000-$600,000
39.6% 37% $500,000+ $600,000+


So, what are the big picture takeaways here?

1)   Generally speaking, the rates themselves are lower pretty much across the board.  The progression is 10%-12%-22%-24%-32%-35%-37%, instead of 10%-15%-25%-28%-33%-35%-39.6%.

2)   The dollar amounts subject to lower rates are generally higher.  Let’s take taxpayers who are married filing jointly – they get an additional $400 of income taxed at the lowest 10% rate, then the next bracket up caps at $77,400 instead of $75,900, the next one up caps at $165,000 instead of $153,100, then at $315,000 instead of $233,350, and so forth.  At the top, only income above $600,000 is taxed at the highest rate, instead of everything above $470,700.  The results are similar for single taxpayers.


While the tax brackets and rates are certainly important, anyone who’s done their own taxes knows that before those numbers apply, you have to determine how much of your income is actually subject to taxation.  This is where the ever-popular “tax deduction” comes in.  Tax deductions come in two primary flavors: 1) “Above the line” deductions; and 2) “Below the line” deductions.

Above the Line Deductions

Above the line deductions are those you enter on the first page of your tax return.  They are technically “adjustments to income” because they are subtracted from your gross income to determine your Adjusted Gross Income (“AGI”).  Generally speaking, above the line deductions are more valuable than their below the line brethren.  This is for two main reasons: 1) You can take above the line deductions even if you don’t itemize your below the line deductions – they are taken in addition to (not instead of) the standard deduction (if you go that route) below the line; and 2) As alluded to above, they reduce your AGI – and the lower your AGI, the more below the line deductions and tax credits you may qualify for.  Let’s go through some of the most common above the line deductions to see what, if anything, has changed under the new law

1)   Traditional IRA Contributions – No change.  Still an above the line deduction, and contribution limits remain $5,500 for people under 50, and $6,500 for folks 50 or older.

2)   Contributions to Other Qualified Retirement Plans – Here, we’re talking about 401(k)’s, 403(b)’s, and other types of retirement plans.  Contributions to these remain above the line deductions as well.  In fact, if your employer withholds your contributions from your paycheck, these contributions are already deducted for you and are not even reported as income on your W-2.  The new law doesn’t make any significant changes here.

3)   Health Savings Account Contributions – There had been talk that the GOP would “supercharge” this deduction by greatly increasing the annual HSA contribution limits.  No such luck.  HSA contributions for 2018 are capped at $3,450 for individuals and $6,900 for families (which represents a small inflation-related increase over 2017, which had already been announced).  These contributions remain an above the line deduction.

4)   Student Loan Interest Payments – This is a big one for those of us who went to graduate school and have what one of my former law school classmates likes to call a “soul-crushing” student loan debt burden.  The current law provides some minor relief from that soul-crushing burden by allowing an above the line deduction for up to $2,500 of student loan interest paid during the year, as long as your income doesn’t exceed certain AGI limits.  The House bill eliminated this deduction completely, and prompted thousands of sad-face emojis from grad school alumni across the country.  Luckily, the Senate swooped in, and in the final law, the student loan interest deduction survived without change.

Below the Line Deductions

When it comes to below the line deductions, we all have two choices, take the Standard Deduction offered by the government, or, if they add up to being more than the Standard Deduction, list and report the various types of expenses the government has decided that you may deduct from your taxable income (i.e. “itemize” your deductions).  Let’s see what happened to some of the most popular below the line deductions:

1)   The Standard Deduction – Before we get into the individual itemized deductions, we have to talk about the Standard Deduction because the changes here will likely lead to a lot less people itemizing.  The amount of the Standard Deduction has increased from $6,350 to $12,000 for individuals, and from $12,700 to $24,000 for folks who are married and filing jointly.  So, cue the confetti and champagne, right?  Not so fast.

While it expands the Standard Deduction, the new law also repeals the “Personal Exemption” which was $4,050 per family member in 2017, subject to being phased out at certain AGI levels.  So, in 2017, a married couple with three children under the age of 18 taking the Standard Deduction could deduct a total of $32,950 below the line: $20,250 ($4,050 x 5 family members) worth of Personal Exemptions, and an additional $12,700 for the Standard Deduction.  In 2018, by taking the Standard Deduction again, that same family of five will only be able to deduct $24,000 below the line because there are no Personal Exemptions available.

2)   Mortgage Interest Deduction – The current law allows you to deduct interest paid on up to $1 million of qualified home acquisition indebtedness with respect to your principal residence and one other residence, as well as interest paid on up to $100,000 of qualifying home equity indebtedness.

The new law does not change anything when it comes to deducting interest on loans used to purchase such residences prior to December 15, 2017.  However, it does place a new cap of $750,000 of acquisition indebtedness used to acquire, build, or substantially improve such residences after December 15, 2017.  It also eliminates any deduction for home equity indebtedness, effective January 1, 2018, without any grandfathering for existing home equity indebtedness. This means that once you kiss your significant other at midnight on New Year’s Eve, you can also kiss goodbye any deduction for home equity indebtedness.

3)   State and Local Tax (“SALT”) Deduction – Currently, you can take a deduction for the amount you pay in state and local property and real estate taxes, plus either the amount you pay in state and local income taxes or state and local sales taxes.  After nearly being eliminated completely, the final law preserves the SALT deduction, but caps it at $10,000 (in the aggregate between property taxes and either income or sales taxes) per year.  In addition, to prevent folks from attempting to maximize their state and local tax deductions in 2017 (before the cap takes effect in 2018), the new rules explicitly state that any 2018 state income taxes paid before the end of 2017 are not deductible in 2017 (and instead will be treated as having been paid at the end of 2018). However, this restriction applies only to the prepayment of income taxes (not property taxes), and applies only to actual 2018 tax liabilities.

4)   Charitable Deduction – No major changes here.  However, while the limit for this deduction is currently 50% of AGI, it will be increasing to 60% of AGI starting in 2018.

5)   Medical Expense Deduction – The current law permits a deduction for medical expenses in excess of 10% of AGI (7.5% of AGI for people 65 and older).  The House bill eliminated this deduction entirely.  However, the Senate stepped in again, and the new law not only retains the deduction, but allows the deduction to begin at 7.5% of AGI for all taxpayers in 2017 (yes, retroactively) and 2018.  After that, the deduction is only available to the extent that expenses exceed 10% of AGI for all taxpayers (so, there’s no 7.5% AGI carve out for those 65 and older).

Tax Credits

Tax credits are awesome because, unlike both above and below the line deductions, they are subtracted from your actual tax liability, instead of from your taxable income.  So, while a $100 tax deduction might save you as much as $37 in taxes in 2018 (if you are in the highest 37% tax bracket), a $100 tax credit will save you $100 in taxes.  Put another way, tax credits reduce the amount of tax you owe dollar for dollar.

There are tax credits out there that apply to premiums for health insurance purchased on the Health Insurance marketplace, certain education expenditures, folks living abroad, and other situations, but I am going to focus on two credits that apply to families and parents:

1)   The Child Tax Credit – Currently, parents get a $1,000 tax credit for each qualifying child under the age of 17, but that credit phases out starting at $75,000 of AGI for individuals, and $110,000 of AGI for those of us who are married filing jointly.  Under the new law, the credit is increased to $2,000 per qualifying child, and the phase out wouldn’t kick in until $200,000 of AGI for individuals and $400,000 of AGI for married couples filing jointly.  In many cases, this will help to offset the loss of the personal exemptions described above.  Of the $2,000 credit per child, $1,400 is “refundable.”  This means that if the application of the credit brings your total federal income tax liability below $0, up to $1,400 of the credit, per child, will still be added to the refund check the government will send you.

2)   The Child and Dependent Care Credit – This provision allows you to claim a tax credit equal to somewhere between 20% and 35% (depending on your AGI) of actual child and dependent care expenses up to $3,000 for one person, and up to $6,000 for two or more people.  This credit was not changed (or seriously threatened to be changed) during the tax overhaul process.

One more thing, Republicans also used the opportunity of crafting a new tax law to strike a serious blow to the crowning legislative achievement of President Trump’s predecessor – namely, Obamacare.  Starting in 2019, the penalty for failing to purchase qualifying healthcare will be reduced to $0.  This is what they mean when they say the new tax law repeals the ‘individual mandate.”

At the end of the day, at least in the short term (the law expires in 2025, unless it is subsequently renewed), most Americans will see at least a small increase in their paychecks because of the new law.  So, who are some of the biggest winners and losers under the new system?

Winners: People with Multiple Children under Age 17.  Most Americans will qualify for the full $2,000 credit, per child.  So, if you’ve got five kids under 17, that’s a $10,000 tax credit and $7,000 of it is refundable.

Losers: High Income Taxpayers in High Tax States.  For some people in places like New York, New Jersey and California, the $10,000 limitation on the SALT deduction will increase their taxable income by $50,000 or more.  Yikes – I guess Republicans figure they weren’t winning these states anyway!

Winners: People with High Medical Expenses.  The Medical Expense Deduction survived and was even expanded for 2017 and 2018.

Losers: Empty Nesters and People without Children.  The Child Tax Credit serves to at least partially offset the loss of the Personal Exemption (and in some cases the math even comes out better for parents).  No such luck if you don’t have any kids under 17.

Winners: Charitable Donors.  Republicans retained this deduction, and increased the percentage of donations that can be deducted.

The Seven “Tenets” of Dealing with Tenants: Tax and Legal Tips for Landlords

December 19, 2017 Real Estate Comments Off on The Seven “Tenets” of Dealing with Tenants: Tax and Legal Tips for Landlords

I realize rentals are not for everyone.  You hear horror stories of trashed properties, non-paying tenants, city citations, “meth-lab rentals”, and the list goes on.  But for every such story, there are many stories of those who have built massive wealth through owning rental real estate.  Of course, you can invest in real estate through REIT’s, but this article is for those who want direct ownership whether it’s a single-family residence, a duplex, or commercial/retail buildings.  If this is you before you take the plunge into owning investment real estate, consider these Seven “Tenets” of Dealing with Tenants:

  1. Put the Rental Property in an Entity. Whether it’s a $50,000 single family residence or a $5M commercial building, it should be held by an entity that provides protection e.g., an LLC.  Be sure to actually transfer title of the rental property into the LLC and in so far as practicable, put everything else associated with the rental in the name of the LLC.    Using an entity to hold your rental property(ies) is important.  It’s about protecting you and your personal assets from the tenant.  If the rental property is encumbered with a loan/mortgage, I nevertheless typically recommend holding the asset in an entity.  Also, it’s important to appropriately determine how many properties should you put in the same entity.  For more on this topic please checkout Mark’s article and video.
  2. Get the Appropriate Type and Amount of Insurance for your Rental(s).  Putting your rentals into an entity is only PART of a coordinated effort to protect you from tenants.  Insurance is the front-line of mitigating risk and shifting liability away from you.  This is not a new or cutting edge tip but it’s important to not cut corners here.  You need to get the right type and amounts of insurance for your rental property.  A good insurance broker can work with your budget to get the policy and coverage that provides the best protection for your situation and your budget.  You may also consider an umbrella policy which is a topic on its own.  For more on that please checkout Mark’s prior article.
  3. Use a Landlord-friendly Rental Contract. In addition to entities and insurance, another important way to shift liability away from you and to mitigate risk is to use a strong rental contract that legally puts as much of the responsibility and risks on the tenant.  Every state has different landlord-tenant laws so it’s important to get a strong contract that is state specific and landlord-friendly, AND specific to your situation.  It’s a much different scenario renting an office suite to a sophisticated business versus renting out a single-family residence to as family as their primary residence versus renting out a property as a vacation rental.   Don’t get caught using a boilerplate contract that doesn’t adequately protect you or that doesn’t address items that are specific to YOUR situation.
  4. Vet the Tenant (and the Property Manager). Although Investors will spend hours and days and weeks meticulously researching the market trying to find the right PROPERTY, many times they give very little thought into finding the right TENANT.  You should spend as much time vetting your tenant as you do vetting the property.  There are a lot of good resources and companies out there who assist with this process, whether or not you use a property manager, to find out as much about the potential tenant as you can BEFORE they start living in your rental.  Likewise, our office has done an entire radio show segment on properly vetting your property manager (“How to manage your property manager”), but it is crucial to have an experienced, honest, and responsive property manager on your side.
  5. Know the Local Laws. Real estate law varies from state to state and in some situations, county by county and city by city, so becoming a landlord and dealing with tenants means subjecting yourself to certain laws and it’s important to know what they are.  For example, in some counties you need to register your investment property with the county assessor and designate it as an investment property.  Also, I wrote a prior article on this but some municipalities have rules and regulations about rentals, particularly vacation rentals. It’s important to work with someone who knows these local laws and can apply them to your situation.  It’s no secret that typically the margins are better with a vacation rental than a traditional/long-term rental BUT not every investment property can and should be a vacation rental.  You’ll need to look at the market, the location of your rental, local law/regulations (see above), and a host of other factors to determine which properties are best to operate as vacation rentals versus long-term/traditional rentals.  Knowing the local laws is an important part of that process.
  6. Maximize the Tax Benefits from your Rental(s). You may have previously read or heard about the four benefits or quadrants of rental real estate: (1) cash flow, (2) appreciation, (3) mortgage pay-down, and (4) taxes.  See here for more detail. The first three are fairly self-explanatory (cash flow = rent covers expenses plus some, appreciation = property appreciates/increases in value, and mortgage pay-down = tenant’s rent pays your mortgage and increases equity in your property.)  With respect to taking full advantage of the last benefit (taxes), PLEASE make sure you’re tracking all of the expenses associated with your rental.  This is where it’s important to have a good bookkeeping system. Hopefully your rentals are cash-flowing, HOWEVER, when it comes to taxes, you MAY be able to report a “loss” and use that loss to offset some of your other income on your tax return!  That’s one of the most powerful aspects of rental real estate.  Typically most of that “loss” comes from claiming depreciation of the property on your tax return.  However, make sure you work with a CPA/accountant who knows rentals that can talk to you about depreciation recapture and the   limits of using “passive losses” to offset other income on your tax return.  For more articles on passive loss limits, see here and call our office.
  7. Consider a 1031 exchange. If your situation AND/OR the market dictates it’s time to sell a rental property, AND if you’re going to get “hit” with a sizeable tax on the gain, one option is to sell the property via a 1031 exchange.  Our office is available to assist you, but in short, you would want to hire a 1031 exchange accommodator before selling the property so that the sales proceeds can be held by the exchange accommodator while you work to find a replacement property(ies) in compliance with the 1031 exchange rules.  As a result, the income tax liability is deferred into your next investment property(ies).  For more on 1031 exchanges, see here and here.

In short, each of these tips has a lot of moving parts so whether you own a portfolio of rental properties or you’re just starting out, please call our office.

Purchasing Homeowner’s Insurance- Strategies & Pitfalls

December 13, 2017 Asset Protection, Business planning Comments Off on Purchasing Homeowner’s Insurance- Strategies & Pitfalls

People who have read Mark Kohler’s Lawyers are Liars know that our philosophy with respect to asset protection is the “multiple barrier approaches” to put as many barriers as you can between you and someone who would sue you.  For owners of real estate, one of primary asset protection barriers is your homeowner’s insurance policy.

No insurance policy will cover all risks under any circumstance, and so it is important for owners of real estate to request, understand and procure the right policy for their situation.   Unfortunately, getting the right policy tailored your situation may not as easy as just calling your insurance agent and getting whatever they recommend, but requires a careful understanding and analysis of risks that can be protected by insurance, but most importantly making sure your policy actually covers those risks.  Your insurance agent should assist you in deciding on appropriate coverage, but remember that you, not the agent, knows this property the best and so it is your job to communicate the risks and perils on the property to the agent.   Some guidelines that can help maximize coverage include the following:

Tip 1. Make sure you are Dealing with a Licensed Insurance Company or Agent.Both Insurance Companies and Agents are generally licensed by the state and their information can be found online at the insurance department for the state.   Most state insurance departments have resources online to assist you in purchasing the right insurance and make sure that the person or company you are dealing with specializes in that specific area of insurance.

Tip 2. Understand What Type of Risks and Coverage You Need.Every property is different and may entail different risks.   The type of insurance will also depend on whether the property is used as a personal residence, long term versus short term rental, or a condo.    In general, homeowner’s insurance is designed to protect against risks that are outside the control of the owner, such as rain, wind, fire, vandalism, pipe bursting, falling objects, theft caused by breakage of glass, etc.   It generally does not cover risks that are within the control of the owner or occupier, such as flooding caused by drain stoppages, mold, toxic materials, pests, damage or injury resulting from deferred maintenance, intentional criminal acts, etc.  Flood and earthquakes generally require a separate policy. A typical homeowner’s policy will generally classify coverage for (1) Dwellings or other structures, (2) Damage to Personal Property, and (3) Liability coverage.   Knowing what you are specifically looking for in the form of coverage BEFORE you shop for insurance will help ensure that the actual coverage you buy matches your expectation.  An insurance agent will typically gather some specifics about your property and (if your lucky) also have a conversation with you regarding appropriate coverage, and based on that alone will make a recommendation of coverage most likely generated from a computer. The insurance agent will rarely have seen the property nor have any idea of any unique risks existing on the property and so it is your responsibility to discuss any unique risks on the property.

For example, for coverage for “Dwellings,” you want to know, from as reliable a source as possible, the estimated cost to repair or replace the structure with like kind and materials in the location where the property is located.  Construction costs vary depending on the location and the actual costs are often higher than what most people think.  Make sure you understand terms used by your insurance company such as the difference between “Actual Cash Value” versus “Replacement Cost” or “Guaranteed Replacement Cost,” with the understanding that insurance companies may define these differently.  For Personal Property, you want to make sure that important items of personal property are covered, how much they are actually worth, and create an inventory or snapshot of your personal property.

Most people are unaware that homeowner’s policies also provide coverage for personal (not business) liabilities that occur outside of the home.  For Liability Coverage, especially for rentals, you need to be very precise as to what your expectations in terms of what are the most horrible things that could cause significant injuries on the property what the appropriate amount of coverage would be.    Create a list of all the risks and perils that are important for the property (e.g. pools, dogs, trees, neighbors???) so that you can address these with the insurance agent.   Also, understand or ask how the deductible amount or other discounts such as alarms or other safety features will impact the premiums.   Consider what the differences in premiums would be if you increased the coverage especially if you have higher net worth as the premium increase for added coverage may not be as much as you think.   Look online for tips from state insurance departments websites such as, or consumer-oriented websites like   for issues and topics that can help you understand what risks and perils you should be aware.

For condos or other common interest developments, there is often a master HOA policy from the homeowner’s association which generally covers the common walls, areas, and roof.  There may be separate policies for earthquake and flood.  Obtain copies of these policies and consider contacting the insurance agent to inquire about any gaps in coverage. The master HOA policy typically does not cover your interior condo unit and so a separate HO-6 is recommended to cover risks occurring from the “walls in.”  Since condo units often have shared walls, make sure you understand how risks occurring in these shared walls, in particular, water damage will be covered as this type of damage is often tricky to determine who should be responsible in the event of a loss.

For landlords (whether long term or short term), there are different policies depending on the use of the property and so make sure you get the proper policy for your specific use of the property. If you change the use of the property, for example, a personal residence to a long term rental, or into a short term rental, you’ll need to get a different policy to cover the different risks involved with the different use of the property.

Tip 3. Keep Detailed Notes of Your Communications with Insurance Representatives and Confirm, Confirm, Confirm. Although the nature of the relationship between the insurance agent and insured could vary depending on laws of the state and whether they are working for the insurance company or an insurance “broker,” you want to be very clear with your insurance representative as to what coverage is important to you, and any specific requests or expectations of coverage should be made or confirmed in writing to the insurance representative.  Ask and confirm with the agent in writing any specific exclusions from the policy.  In other words, if the agent makes a representation of coverage to you that is important, send a confirmation of that representation in writing (e.g. email, fax, etc.) so that a record exists confirming your expectations.  Better yet, ask the agent for a copy of the policy beforehand.  Most agents won’t volunteer this but any agent that has been doing this for any amount of time should have this handy.   Keep copies of everything, including advertisements and marketing as that information could be relevant in a coverage dispute.   If you’re not sure about the type or amount of coverage you need, ask the insurance agent for their opinion and confirm this opinion in writing.  An insurance agent who makes a representation to you concerning coverage could be bound by that representation even if it doesn’t appear in the policy so it is important to document all communications with the agent to hold them accountable for what they say.

Tip 4. Read Your Policy. I’m not talking about the 1-2 page “Declarations Page” that is only designed to show proof of coverage, but 20-30 page insurance “Binder” or “Policy” that contains the details of the actual coverage and exclusions.  No one really enjoys reading insurance policies and don’t be surprised or embarrassed if you don’t understand what you are reading.  It is a well known fact that insurance companies intentionally make their policy language difficult so as to create ambiguities as to their coverage responsibility.    Nevertheless, don’t let the first time you read the policy to be when you need to file claim.   Get ahead of it beforehand which will give you the perfect opportunity to ask questions and to clarify coverage with the insurance agent before a claim arises (See #2 above).   Be assured that if a claim is ever made, the adjusters and defense attorneys will be combing through the policy language with a fine toothed comb to try and evade responsibility.   If you do ask questions about the policy language, don’t be surprised if the insurance agent initially doesn’t understand what the policy says either as that is quite often the case, but make sure you get an answer to your questions in writing.

Tip 5. Coverage for an LLC.For those of you who own rental property in an LLC, check with your insurance agent as to what they would require to add the LLC as an additional insured.  Some companies will simply add the LLC as an additional insured in addition to the owners.  If your insurance agent tries to sell you a different policy such as a commercial policy, consider getting a second opinion, and again, do not rely merely on the verbal assurances of your agent, but confirm it in writing.   If you have a mortgage, be aware that some lenders may periodically ask for proof of coverage, and so there are possible due on sale implications for adding an LLC as additional insured.

Getting the right insurance coverage should be one of your front line defenses in your overall asset protection strategy.  Doing your homework beforehand, exercising proper due diligence during the process, and making sure there is a paper trail of your dealings with the insurance company will help ensure that there will be coverage in the event of a loss.