With this opportunity to build assets and increase income, however, comes the reality that the more you accumulate, the more vulnerable you become as a legal target. Each additional income property becomes a new liability; each new tenant, a prospective bandit. Even the best of people can transform into the worst of nightmares if circumstances permit.

Why would you view your real estate investments any different than you would your other assets? You wouldn’t. In fact, it’s one of the few assets you cannot hide; not physically anyway. How can you protect these assets? There are several ways.

First, keep in mind that attacks can come from different directions. Separating the assets of your real estate business (if you own income property, you need to recognize that it is a business) from your personal assets can allow you to protect you and your family from attacks against your real estate business. However, a personal lawsuit can reach through your personal assets to even those assets you own via a separate entity. This is one reason owning income property via a corporation might protect you personally from a tenant lawsuit, but could jeopardize your corporate assets if you are the target of a personal lawsuit.

Many real estate investors find that using a corporation to “flip” properties is useful, but to hold property long term, an LLC (Limited Liability Company) may be a better choice. Why? Primarily for liability reasons. The LLC benefits from a different set of laws as to how creditors go about collecting their debts (or spoils, as some would call it).

The LLC shares some of the legal features of a limited partnership, one of which is the “charging order.” If a creditor sues you personally and you own a majority of shares in a corporation for instance, the creditor could, by controlling your ownership, force the liquidation of assets from the corporation to settle accounts.

If you have ownership in an LLC, however, the creditor must deal with a charging order, which effectively gives the creditor rights to any profits disbursed to you from the LLC, but it has no power to force disbursement. LLC's file a partnership return on IRS form 1065 each year allocating all profits and losses to each member via form K1. All members must claim these profits, if any, on their personal tax returns, whether they actually receive the money or not. This means the LLC could retain earnings and assets and simply not pay out profits, but the creditor must still claim the income allocated each year from the LLC and pay taxes on it. This is not the most exciting prospect for any creditor, so it can serve as a deterrent to frivolous litigation.

This is really only the first step in protecting your investments. As you might guess, it is subject to judges who can be capricious. What do you do if a wild jurist decides to bend the law and make an exception in your case? What if he or she forces the liquidation of your LLC? There have been cases. If your equity or assets are substantial enough and it is deemed unfair that the creditor be unable to settle accounts, this could certainly be a tempting solution.