Got property, Got LLC, need help

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Any expert who happens to be in the mood to comment, please feel free. Newbie has question...

I want to sell a condo recently purchased in my name via a promissory note to recently formed LLC (with partner) and I want to secure it with the property. Anyone know if its necessary to create a second document for a Deed of Trust or can I simply state that it is secured by specifying the property address on the note itself? Any comments appreciated. Thanks!

Comments(5)

  • 26th May, 2003

    Quote:
    On 2003-05-23 00:47, mlawre wrote:
    Any expert who happens to be in the mood to comment, please feel free. Newbie has question...

    I want to sell a condo recently purchased in my name via a promissory note to recently formed LLC (with partner) and I want to secure it with the property. Anyone know if its necessary to create a second document for a Deed of Trust or can I simply state that it is secured by specifying the property address on the note itself? Any comments appreciated. Thanks!


    A: You need two documents. One is the promissory note and the other is a deed of trust that is filed with the county where the real estate is located. Without filing the deed of trust, the promissory note is not secured against the property.

    But why sell to the LLC where you will be an owner? That is not the most tax advantageous method (if the property is not going to be developed; if it is, selling it to the LLC is the best method since you get the lower capital gains tax on the sale). You may want to just contribute it to the LLC and get a capital contribution for that amount. In that case the contribution will not be taxable. If you want to ensure that you get the first profits out of the deal to the amount of your equity, structure the capital contribution as a preferred equity interest (similar to preferred stock). You can even have the preferred equity have a preferred dividend rate of X% (e.g. 8% cumulative preferred, meaning that each year you get paid 8% of the first profits from the deal and if there are no profits, the 8% cumulates to the next year; then after the second year you get the first 16% of the profits on your capital amount).

    Good luck,

    Taxjunkie

  • mlawre26th May, 2003

    Wow, thanks for reply. Greatly appreciated. The reason I'm selling it to the LLC is because I took a personal equity loan from my own home to purchase it outright. Outside of that, my partner and I each contributed 4k to the LLC for 50% ownership.

    Nice to get a reply from an expert. Btw, how and how much does an expert typically charge for legal/tax advice for matters such as these? Thx.

    Michael

  • dsterlin3rd June, 2003

    taxjunkie:

    Could you please comment on ways to avoid the 'due on sale' triggering on the mortgage when you contribute property to the LLC?

  • 4th June, 2003

    Quote:
    On 2003-06-03 12:02, dsterlin wrote:
    taxjunkie:

    Could you please comment on ways to avoid the 'due on sale' triggering on the mortgage when you contribute property to the LLC?


    dsterlin: Your question is getting off the topic posted here, so I would suggest in the future you post a new topic with your question (the reason is that others may find your question and the comments by posters helpful .. it is easier to search by posting topic).

    To answer your question .. you need the lender's consent to transfer the property to an LLC without triggering the due-on-sale clause. If you do make the transfer but do not get the lender's consent, you will be in breach of the loan agreement which the lender could then call the loan immediately payable (with any prepay penalties if there are any) if the lender discovers the transfer (which is not likely, but that is a risk issue for you to decide).

    Taxjunkie

  • 4th June, 2003

    [Btw, how and how much does an expert typically charge for legal/tax advice for matters such as these? Thx.

    Michael
    [/quote]

    A: It depends on the complexity of the entire transaction. Lawyers set their own legal fees per hour, but generally it ranges in most metropolitan areas from $100/hr to over $500/hr. The issue should not be how much it costs you, but how much you can save by avoiding legal problems later (or saving tax dollars).

    The other point is that the advice nice, but the implementation is just as, if not more, important. This is where the knowledgeable legal advisor can put into words (in the document) the business concepts you are trying to achieve.

    Hope that helps,

    Taxjunkie

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