THE CASTLE KEEP ASSET PROTECTION STRATEGIES GARRETT SUTTON
3. Spec home sales. Whether building one home for speculative sale purposes or building a subdivision full of identical tract homes, Sammy knew that a unique protection strategy was needed when he started in spec home sales. This was because more and more lawyers across the country were bringing lawsuits alleging damage from mistakes during construction, known as construction defect litigation. Plaintiff’ s lawyers were filing lawsuits on behalf of homeowners alleging monetary damages due to settling, cracks, improper construction practices, and the like. These suits were especially prevalent in California and Nevada, where a ten year statute of limitations allowed suits to be brought a decade after a house was built.
Each time Sammy builds a spec home he uses a new entity. Again, because of its asset protection benefits and efficient flowthrough taxation of income, Sammy uses a separate LLC for each custom home he builds. In California, because of the extra state taxes on LLCs, he uses an LP with a corporate general partner as his developer entity.
The key to Sammy’ s strategy is to keep each entity active after the house had been sold. This is to thwart the aggrieved homeowners and their lawyers who have ten years to bring a construction defect claim. Too many builders believe that by having tail insurance they can dissolve the construction entity. But insurance doesn’ t cover every claim, and dissolving the entity leaves you personally responsible. By keeping the entity alive during the tenyear statute of limitations period, any claim would be brought against the LLC or LP, not personally against the owners.
But isn’ t it expensive to keep an entity alive for ten years? What about all the filing fees and tax returns? As Sammy knows, it isn’ t a burden if done the right way.
As far as tax returns are concerned, once each house is sold a final tax return for the entity is prepared. The LLC or LP stays alive but has no activity and thus does not have to file an ongoing return. In terms of annual filing fees, some states are more expensive than others. In California it is $ 800 per year per entity. Including a $ 125 annual resident agent fee, the tenyear cost per entity is $ 9,250.