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A Super-Powerful Asset Protection Strategy – Debt!

Asset protection is more important now than ever before because there are 82,000 lawsuits filed DAILY with real estate being a BIG target. There are numerous vehicles to protect you – LLCs, trusts, insurance – including combinations of these.

Equity Stripping

lawsuit form

82,000 lawsuits are filed DAILY and real estate is a BIG target.

There’s a also very powerful (but overlooked) asset protection technique called “equity stripping.”

Equity stripping basically is being drowned in debt with no equity, so no one would ever want to go near you with a legal action, unless they are nuts!

The debt will be owed to a company (LLC) you control but separate from you. Regardless of the number of properties you have, with equity stripping you only need two LLCs.

The first LLC is your “real estate LLC” holding all of your investment properties, which is typically formed in the state of the property location.

The second LLC is your “lender LLC” to create secured loans on properties in your “real estate LLC,” so there is NO equity in your real estate LLC. As such, there is NO target for wrongful creditors and money-hungry lawyers. Because it does not own any property, the lender LLC can be formed in Wyoming, which has the absolute best privacy.

Equity stripping is like getting a secured loan from an outside lender, except here the lender is your own LLC company under your control. The lender LLC company (now holding your equity) is not reachable by creditors and it owns a non-risk asset – “paper” – which does not cause lawsuits.

Properly structured,  equity stripping can be done with or without cash being transferred as part of the secured loan, which again strips out the equity in the real estate LLC.

Using multiple LLCs separates each property’s equity, which is protective, but does not totally strip out the equity like equity stripping and is much more expensive.  Equity stripping can be used in any state. See below for an equity stripping diagram-example with $100,000 of equity being stripped out.

Valid Secured Debt Between Two Separate Statutory Entities

 Real Estate LLC

Lender LLC (WY) 

Value      $   400,000
Bank Mtg.  -300,000
 NO-Risk Mortgage
2nd Mtg.    -100,000  Asset….+$100,000
Your RE Equity=ZERO  Paper (Protected) Equity = $100,000

The Great Benefits Of Equity Stripping

  • Lawsuit Prevention – Stops legal actions before they would ever begin because no one wants to sue people in debt, unless they are prepared to pay large non-contingent fees to an attorney, who still would not give any guarantees.
  • Much less expensive and less time consuming than using an LLC for every property, saving you thousands in legal fees, plus your time.
  • Ironclad. Properly structured, it is the only asset protection vehicle that has never been collapsed!  And combined with a properly structured LLC, it gives impenetrable protection!

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About the Author...

Al Aiello, CPA, MS Taxation, Real Estate Investor is a National Speaker and foremost expert on Wealth Protection for Real Estate Investors. The LLC Master Machine is the asset protection system he designed specifically for real estate investors. For more information about this money-saving system go here.

Comments

  1. Tom DeVoe says:

    Mr. Aiello,

    This might be the most important article a serious real estate investor needs to read! I applaud you, sir, for your wealth protection wisdom. And a special thanks to JP Vaughan for being such an inspiring hostess!

    • J.P. Vaughan says:

      Thank you for the kind words, Tom. Al Aiello is a genius when it comes to asset protection and tax reduction.

      JP

  2. John Corey says:

    Does the WY LLC have to register as a foreign corporation in the state or states where it has made a loan?

    For the ‘loan’ to be valid and not swept aside as just paperwork with no material purpose, does the borrower need to make any payments or do anything to show the loan is truly a loan?

    Assume that the RE investor wants to sell the property and to do so they are going to provide clear title. How is the debt handled? If the debt is forgiven would the IRS care and expect to collect tax on a forgiven debt?

    If there are debts forgiven with no tax impact and no payments made, would such a track record start to provide evidence that the loans are fictions so a judge could set them aside in a liability lawsuit?

    • Al Aiello says:

      Does the WY LLC have to register as a foreign corporation in the state or states where it has made a loan?

      ANSWER: NO it does not own property.

      For the ‘loan’ to be valid and not swept aside as just paperwork with no material purpose, does the borrower need to make any payments or do anything to show the loan is truly a loan?

      ANSWER:

      A material purpose should be documented by way of a company resolution such as need for working capital which every business needs. Payments do not have to be made but interest should be accrued (at market rates) and added to the loan balance and imputed for IRS purpose. Doing this especially the latter (IRS compliance) along with standard loan documents and resolutions will make this transaction just about impossible to collapse ( as it has never been collapsed)

      Assume that the RE investor wants to sell the property and to do so they are going to provide clear title. How is the debt handled? If the debt is forgiven would the IRS care and expect to collect tax on a forgiven debt?

      ANSWER:

      Upon the sale, the loan is paid off or you can release the lien (not the debt) and put the lien on another property. By not releasing the debt there is no debt forgiveness and no resultant taxation.

      If there are debts forgiven with no tax impact and no payments made, would such a track record start to provide evidence that the loans are fictions so a judge could set them aside in a liability lawsuit?

      ANSWER: NO see the above answers.

  3. Chris In FL says:

    I echo John’s questions/concerns. I have read Al Aiello many times, mostly on tax reduction strategies for R.E. He is ‘genius’, with some strategies that conservative accountants would consider risky. I have also studied equity stripping, and the details usually always said that the mortgages must be legit, with payments, etc., or they could very well be set aside by a judge (if it came to that). The flip side of that being, the equity stripping itself hopefully prevents a law suit from happening (thus the details of the mortgages would never be dug into).

    In the article, Al says it will work ‘properly structured… with or without cash being transferred”. Curious what properly structured involves/means?

    Also, equity stripping, if done right, seems great for asset protection, but it has a down side. If you are done building, i.e. already wealthy, and headed towards retirement, two thumbs up. However, if you are in the empire building stage, or plan on other future borrowing, not many lenders will be interested in someone that appears leveraged to the hilt, even if you explain it all to them and show them the details (which I assume you would not want to do). Maybe then your LLC with the mortgages can borrow by collateralizing the paper (but probably only if the mortgages are legit, with streams of payments, cash on hand, etc.)?

    Hope this thread picks up… I will enjoy it. It is actually one of many asset protection strategies I have on my list of things I plan to discuss with my attorney very soon – starting to shift some emphasis from growth to protection.

    Best wishes,
    Chris in FL

    • Al Aiello says:

      Properly structured equity stripping does not interfere with anything including getting outside loans. It can be done without cash as line of credit. With the proper documentation this is fine too. It has never been collapsed and is the best, only and cheapest way to protect property equity within an entity such as an LLC.

      Thank you, Al Aiello

  4. kriskrohan says:

    Hmm it appears like your blog ate my first comment (it was extremely long) so I guess I’ll just sum it up what I wrote and say, I’m thoroughly enjoying your blog.

  5. Jim Ingersoll says:

    Nicely done Al!

    I agree with simple approaches and this one works well. Another way to do it without and LLC would be to use a self-directed IRA as the lender. That way you would not need to file annual LLC charges or a tax return. The equity stripping approach works great as phantom debt.

    Asset protection is like peeling back an onion, you need layers of protection including strong liability insurance, umbrellas, LLC’s and I like to use a trust as well.

    For free and clear houses, your approach is dynamite and easy for everyone to implement.

    Jim

    • Al Aiello says:

      Jim I totally agree, the only thing the self-directed IRA cannot be yours otherwise there are self-dealing penalties. The tax return for the lender LLC is very simple.

      Thank you, Al Aiello

  6. Jim Ingersoll says:

    Good points!

    Jim

  7. Do you know any one that could set up my 13 parcels with this protection? I am selling them all on a land contract for five years and since I hold them personally, I want to change that now for protection from any potential problems. Please advise immediately who is this knowledgeable to help me, since buyers are waiting for me right now
    Thank you

  8. Who would you recommend to use to set up a friendly loan like this between the lending entity that I own and the real estate entity?

    Thanks

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