Well I finally jump in, Almost done on my first rehab property. I bought the property on my own name. When I sell it, should I first establish a LLC or some sort of business entity?
I would have thought that before you bought the property you would have set up your LLC and put the property in the companies name. I am not a TAX Lawyer nor accountant but My first thought was that I set up a company and I would put every part of my business under that instead of personal.
I need better understanding as well
I agree, it is late to think about setting up an entity now. To move it into the LLC, you will have to sell it to the LLC, and pay transfer tax etc. My recommendation is to sell it in your name, you have already assumed the risk, and put yourself and your assets on the line. Just sell it with you as the owner, and don't ever buy another property using your name again. If you are worried about income taxes, you may be able to do a 1031 exchange and use a land trust, but you need to discuss it with your tax advisor and your attorney first. If you don't have either of these, get them before you do anything else.
A few things:
First there is not transfer tax to transfer property into your LLC...
You did the work to the house as a sole proprieter. Rehabbing is an active trade or business and in essence the houses are classified as an "inventory" to the IRS. Since you purchased the property in your own name, you will be subject to a 15.3% self employment tax unless you make over $89,000/yr IN ADDITION to ordinary income tax. You are taxed only on your gain ($100,000 purch price + $20,000 rehab costs = $120,000 into it.....Sell for $150,000 and get taxed on $30,000).
The only option I am aware of as a layman and not as an accountant or tax attorney would be to move into the property and live there. If you live in the house for the past 2 out of 5 years, the capital gains are not taxable up to $250,000 if you are single or $500,000 if you are married. However, if you have to move due to "unforseen circumstances" you can prorate the exemption and may be able to move in a few months. Please see my article for more info on this: http://www.thecreativeinvestor.com/modules.php?name=News&file=article&sid=415
The best thing here is that you jumped in an started! Thats more than most people will ever do. I say so what if you have to pay extra tax. I'm sure you feel like you have made a ton of mistakes and you can fix them in your next project! Cough it up to experience and tuition to the University of Hard Knocks, the best but most expensive university around!
If I may ask, how do you go about in transferring the property in you LLC, and also when you sell, who's name will be in it. Also by transffering the property, Will it cause the DOS(Due on Sale) to be triggered?
Could You elaborate on this? I am having a similar problem as the Gentleman above. The Loan Rates/Terms are outrageous for a LLC as compared to me getting the loan myself.
The bottom line with the LLC vs. your own name in regard to short term rehabbing – it doesn’t matter! I’m sure the heat will rain down for saying it, and that many will post to refute...
I buy property in both my personal name and in various entities, and never bat an eye at either scenario. Is everybody involved insured? They should be. Did you get your hazard insurance? You should have. I know many 20+ year REI vets who buy primarily in their own name, with few problems. Do you think the headache of your company being sued is any less than being sued personally? Do you have a single member LLC? Do you think it will be so difficult for a shrewd lawyer to make a case, true or not, that your LLC is a sham?
I’m not against LLC entities, I’m an advocate. All I’m saying is – don’t sweat over it.
The LLC has a definite place, and a variety of uses, especially once your projects begin to run concurrent. And once you’re doing enough to justify it, a corporation will offer the greatest protection and benefit. Each in it’s own time, and place.
Many lenders will not make loans to entities, even with a personal guarantee, and the underwriters don’t want any mention of them in the paperwork. Those same lenders may often advise you to simply quit claim the property to the LLC after the closing. Do this on your next project, if it makes you more comfortable.
And the taxes? Consider yourself blessed! You should love to pay, live to pay! Be like Elvis and brag about how much you pay in taxes. Why? Myfrogger’s post sums it all up. It means your making money, you’re doing things. Many folks spend so much time worrying about how to beat the taxes and the other pitfalls that they do nothing at all. The greatest sin.
For lack of a better analogy (I’m tired): real estate is a big, messy, overgrown swamp. You are just a guy with a machete. Know what you’re getting yourself into, but don’t spend the day contemplating the task. Start chopping and move in a forward direction. Adjust your swing, speed and approach as you go. The real problems present themselves in the doing, but fortunately, the solutions become more evident as well.
You’ll emerge covered in scars, bites, tears, stories, and a big grin. It should be fun.
I would have thought that before you bought the property you would have set up your LLC and put the property in the companies name. I am not a TAX Lawyer nor accountant but My first thought was that I set up a company and I would put every part of my business under that instead of personal.
I need better understanding as well
I agree, it is late to think about setting up an entity now. To move it into the LLC, you will have to sell it to the LLC, and pay transfer tax etc. My recommendation is to sell it in your name, you have already assumed the risk, and put yourself and your assets on the line. Just sell it with you as the owner, and don't ever buy another property using your name again. If you are worried about income taxes, you may be able to do a 1031 exchange and use a land trust, but you need to discuss it with your tax advisor and your attorney first. If you don't have either of these, get them before you do anything else.
Thanks for the reply guys, The reason i got the loan on my own name is, I would have a very hard time to acquire the loan under a LLC
A few things:
First there is not transfer tax to transfer property into your LLC...
You did the work to the house as a sole proprieter. Rehabbing is an active trade or business and in essence the houses are classified as an "inventory" to the IRS. Since you purchased the property in your own name, you will be subject to a 15.3% self employment tax unless you make over $89,000/yr IN ADDITION to ordinary income tax. You are taxed only on your gain ($100,000 purch price + $20,000 rehab costs = $120,000 into it.....Sell for $150,000 and get taxed on $30,000).
The only option I am aware of as a layman and not as an accountant or tax attorney would be to move into the property and live there. If you live in the house for the past 2 out of 5 years, the capital gains are not taxable up to $250,000 if you are single or $500,000 if you are married. However, if you have to move due to "unforseen circumstances" you can prorate the exemption and may be able to move in a few months. Please see my article for more info on this:
http://www.thecreativeinvestor.com/modules.php?name=News&file=article&sid=415
The best thing here is that you jumped in an started! Thats more than most people will ever do. I say so what if you have to pay extra tax. I'm sure you feel like you have made a ton of mistakes and you can fix them in your next project! Cough it up to experience and tuition to the University of Hard Knocks, the best but most expensive university around!
Good luck!
We buy everything in our names and then put them into our LLC.
Thanks,
OnTheWater
If I may ask, how do you go about in transferring the property in you LLC, and also when you sell, who's name will be in it. Also by transffering the property, Will it cause the DOS(Due on Sale) to be triggered?
Quote:
On 2003-12-01 15:39, OnTheWater wrote:
We buy everything in our names and then put them into our LLC.
Thanks,
OnTheWater <IMG SRC="images/forum/smilies/icon_biggrin.gif">
Could You elaborate on this? I am having a similar problem as the Gentleman above. The Loan Rates/Terms are outrageous for a LLC as compared to me getting the loan myself.
couple things:
when you form the LLC, the house could be the capital you contribute in exchange for 100% of the LLC.
I was sure surprised how easy my lender and credit usinon where to put in the name of LLC. Not personal gaurantee mentioned yet either.
OnTheWater
How do you get it in the LLC? Do you just call the house an additional capital call?
ykulit,
The bottom line with the LLC vs. your own name in regard to short term rehabbing – it doesn’t matter! I’m sure the heat will rain down for saying it, and that many will post to refute...
I buy property in both my personal name and in various entities, and never bat an eye at either scenario. Is everybody involved insured? They should be. Did you get your hazard insurance? You should have. I know many 20+ year REI vets who buy primarily in their own name, with few problems. Do you think the headache of your company being sued is any less than being sued personally? Do you have a single member LLC? Do you think it will be so difficult for a shrewd lawyer to make a case, true or not, that your LLC is a sham?
I’m not against LLC entities, I’m an advocate. All I’m saying is – don’t sweat over it.
The LLC has a definite place, and a variety of uses, especially once your projects begin to run concurrent. And once you’re doing enough to justify it, a corporation will offer the greatest protection and benefit. Each in it’s own time, and place.
Many lenders will not make loans to entities, even with a personal guarantee, and the underwriters don’t want any mention of them in the paperwork. Those same lenders may often advise you to simply quit claim the property to the LLC after the closing. Do this on your next project, if it makes you more comfortable.
And the taxes? Consider yourself blessed! You should love to pay, live to pay! Be like Elvis and brag about how much you pay in taxes. Why? Myfrogger’s post sums it all up. It means your making money, you’re doing things. Many folks spend so much time worrying about how to beat the taxes and the other pitfalls that they do nothing at all. The greatest sin.
For lack of a better analogy (I’m tired): real estate is a big, messy, overgrown swamp. You are just a guy with a machete. Know what you’re getting yourself into, but don’t spend the day contemplating the task. Start chopping and move in a forward direction. Adjust your swing, speed and approach as you go. The real problems present themselves in the doing, but fortunately, the solutions become more evident as well.
You’ll emerge covered in scars, bites, tears, stories, and a big grin. It should be fun.
Besides, there’s nothing on TV.
Best of luck,
Quinn
[ Edited by agent89 on Date 05/24/2004 ]