LLC questions
I am in the process of purchasing two condos. I formed an LLC to handle the condos as rental units. The mortgage company told me that they would not give a mortgage to an LLC and that they would not go through the closing if the title was in the name of the LLC. The lady at the mortgage company told me I should just close on the properties and then transfer them to the LLC. I would like to avoid paying a lot of extra fees. The lady at the title company told me that I would have to pay doc stamps again if I transfer the title to the LLC. This doesn't seem right to me. I don't understand why I should have to pay double doc stamps of about $700 per $100,000 of property value. Can I just write up a quick claim deed transferring the property from my name to the LLC for minimal consideration (70 cents) and take it to the court house and pay a few dollars to file it?
Also, could someone explain to me the pros and cons of declaring an LLC as a corporation for tax purposes. I have a single member LLC and I am unsure whether it should be disregarded as an entity seperate from its owner or whether I should fill out form 8832 to declare it as taxable as a corporation. I have been told to keep everything seperate from my personal accounts in case of any future litigation. I was going to fill out the SS4 in order to open a bank account in the name of the LLC, but I am confused about which way to declare it.
whats an llc?
ParamountCaliber,
Sounds like you have some interesting questions. Many investors may have a different take on how to handle the above situation. I think that in order to protect your best interest, you might call a local CPA, and get their input on the tax implications. As of transfering the title from your name to your LLC, you might also visit with a local attorney who SPECIALIZES in real estate. Sorry that I couldn't provide you with a more direct answer, but for these personal situations, it is always best to talk directly with a professional in their own field. Best of Success!
LLC stands for Limited Liability Company
ParamountCaliber,
Generally speaking, you do not want to hold your investment rental property in a corporation. If a "C" corporation's income is solely from passive activities, such as rental income, it may be subject to personal holding company tax. In other posts in this forum, Taxjunkie gave you some other negative input on this question including increased difficulty in taking the property out of the business entity, and potential for double taxation on profits.
Some lenders will give a commercial loan on a property held by a Corporation or LLC, but you most probably will have to personally guarantee the loan, pay a higher interest rate, and you may have a 15 year amortization schedule (perhaps even with a 5 year balloon).
I must admit that I am a little fuzzy on what is being said here.
I've always understood that an LLC's income "passes" through to the owners. For taxation purposes an LLC functions like an S Corp. Additionally, I've always thought that the reasoning behind holding your rental properties in an LLC isn't so much for income as it is for asset protection.
I feel like I am missing a BIG piece of the picture. Can someone please enlighten me on this subject?
[addsig]
Kevin,
The original question was: "Also, could someone explain to me the pros and cons of declaring an LLC as a corporation for tax purposes?"
An LLC can be classified as a limited partnership, as a corporation, or as a disregarded entity. My discussion was limited to the "cons" of declaring an LLC as a corporation.
Some states require the LLC to have two or more members, which seems to force election as either a corporation or partnership (I am a little shaky on this point). Although, when the state requires the LLC to have at least two members, one member could be a corporation in which the other member is the sole shareholder, officer, and director. In this case, only one member is a natural person who also controls the corporate member -- effectively creating a single member LLC in a state that requires the LLC to have at least two members.
Does this help you see a little bit more of the "big picture"?
DaveT,
Thanks for your insight. What you just posted makes much more sense.
Obviously, an LLC functions as the entity chosen by the founder(s) when he/they set it up. As a partnership it would provide asset protection and pass-through income to the owners.
I see the light! Thanks again.
[addsig]
If you classify the LLC as a disregarded entity do you have the same degree of asset protection as you would if you had declared it as a corporation? Are there any beneifts to declaring it as a corporation? If it is declared as a disregarded entity than you wouldn't have seperate tax returns, right? So would be easier for some one to sue you for your personal assets. If that were the case than it would almost defeat the purpose of forming the LLC.
I live in Florida where there is no problem with a single member LLC.
Quote:
On 2003-03-27 22:50, ParamountCaliber wrote:
If you classify the LLC as a disregarded entity do you have the same degree of asset protection as you would if you had declared it as a corporation?
A LLC that is "disregarded" means that it is disregarded for federal tax purposes, not state law purposes. A disregarded LLC for federal tax purposes means that the owner of the LLC reports all of the income of the LLC as if the LLC did not exist. If the owner is a individual, the individual reports all of the income on Schedule E (if it is a passive holding of real estate) or Schedule C (if you are in the real estate business). If the owner is a partnership or corporation, then that entity reports all of the income from the LLC.
For asset protection issues, state law controls. LLC's are entities created under state law, not federal law. So, the fact that federal tax law disregards an LLC is irrelevant to the asset protection issue. Nevertheless, if you only have a single member LLC, some attorneys think that a court would be much more willing to "pierce the LLC veil" and let the member's creditor attach a judgment against the LLC assets. So, the more members you have in the LLC, the less likely a judge will "pierce the LLC veil" (meaning disregard the entity and attach a judgment against the assets of the LLC).
Are there any beneifts to declaring it as a corporation?
For real estate activities, it is rare that you want to "check the box" (filing IRS form 8832) to make the LLC taxable as a corporation. There are no asset protection benefits of making it a corporation for tax purposes because, as I mentioned above, state law and not federal tax law controls the issue for most asset protection issues.
If it is declared as a disregarded entity than you wouldn't have seperate tax returns, right?
Correct.
So would be easier for some one to sue you for your personal assets.
Not true, see my post above. You must distinguish state law from federal tax law on this issue.
If that were the case than it would almost defeat the purpose of forming the LLC.
I live in Florida where there is no problem with a single member LLC.
Given that the Florida constitution does not permit individual state income taxes, a single member LLC may be beneficial. However, you need to check to see if Florida imposes a franchise tax on LLC income even if it is disregarded for federal tax purposes. Remember, just because the LLC is disregarded for federal tax purposes does not mean that it is disregarded for state income tax purposes. States are free to tax how they choose. For example, individuals in Texas do not pay an individual income tax. However, LLCs (even single member LLCs) pay a state corporate franchise tax.
Hope that helps,
Taxjunkie
not impose a tax on
ParamountCaliber:
Find a new mortgage lender and title company. I have worked with many mortgage companies and they have loaned the mortgage money to the LLC secured by the real estate. However, they will usually require a personal guarantee by you.
Please note that if the mortgage is being sold on the secondary FANNIE MAE/FREDDIE MAC loan market, some lenders will not fund the loan in the LLC's name because it makes it more difficult to sell the mortgage on the secondary market. That may be the reason you are having problems. You may want to get a portfolio loan where they securitize the loan with a bunch of other loans and sell them in the secondary market to investors. The interest rates may be a slight bit higher though on portfolio loans.
In any case, do not follow the advice of the mortgage person who says "fund it in your name and then transfer the real estate into the LLC after the loan is funded." While the transfer will, in many cases, be a non-taxable transfer for federal income tax purposes, you need to be concerned about the due-on-transfer (DOT)(also called a due-on-sale) clause in the mortgage documents because if you follow that person's advice, you will have violated the mortgage agreement, giving the lender the right to call the mortgage all due and payable.
Hope that helps,
Taxjunkie
Thank-you very much for the great information. Unfortunately, I did follow the mortgage lady's advice. She has been in the business a long time and has a good reputation. Also, the lawyer who helped me form the LLC told me that people do that all the time. He told me it wouldn't be a problem. The lawyer and the mortgage lady told me that the "due-on-sale" clause was to protect the bank in case there were problems with payment and that the banks won't just utilize the clause because you transfer the title to an LLC, but they have the option to do so if there are problems. So for example, if you transfer the title to the LLC and then the LLC gets into legal trouble, the bank can require that you pay off the mortgage balance.
It didn't seem like the best way to me, but they told me there weren't any other options. The mortgage lady told me that she does this for people all time and she has never seen the bank enforce the "due-on-sale" clause in this type of a situation. She worked in the mortgage department at Bank of America for over 20 years before starting her own mortgage broker's office. The lawyer also told me this was true. My mortgages are through Bank of America so I figured this lady knew what she was talking about.
I feel like I have been given very bad advice and I don't know what I should do now. If I transfer the titles to the LLC I am taking the risk of the bank requiring the mortgages to be paid off and if I don't transfer them I won't have the asset protection and security of knowing that my personal property is protected if something should happen with my investment properties. I read over the mortgage paperwork carefully and did see that it was referred to in the documents as a Fannie Mae/Freddie Mac UNIFORM INSTRUMENT.
Is there any effective strategy in this situation? I could try to get a loan for the LLC and then use it to pay off the mortgages with Bank of America, but that would probably be very costly and I doubt it would get approved.
I really appreciate any all help and advice.
[ Edited by ParamountCaliber on Date 03/29/2003 ]
ParamountCaliber,
Have you thought about transferring the title into a Title-holding Trust with your LLC as Trustee? You are legally allowed to hold your real estate in a Land Trust and your mortgagor can't do anything about it. This kind of legal transfer of title will not invoke the "Due on Sale" clause because their hasn't been a sale. In this kind of scenario, the Trust you establish owns the property, the LLC controls the Trust, and YOU own the LLC that controls the Trust. Does this make any sense?
I have heard of this kind of Title transfer many times before and I understand it works like a champ. I am in your same situation (I am about to acquire a rental property through personal means, but want to hold Title with my LLC). I think holding Title like this might just be the ticket. Hope this helps.
[addsig]
KEVIN is K-REKT!
YOu'd get DOUBLE the A$$et Protection this way!
First and foremost from the Transfer into a Revocable Living Trust (Simple Land Trust) and nominating/assigning Beneficial Interest to your 'co-member' LLC.
This Trust not only 'Buffercates' your title (as Kevin said) but the assignment to your LLC further insulates your property from involvment in 'untoward actions'... such as lawsuits, Divorce, Bankruptcy, creditor judgments, fed & state liens etc.
Kinda like wearing a Belt + Suspenders!
All without the FEAR or likelihood of being hit with a DOSC violation by your lender.
Oh yeah and BTW - your ownership still remains anonymous...considering that most lawyers won't consider piercing the double veils (that might contain 2 More and so on) to be NOT WORTH THEIR WHILE vs. the Costs involved.
A STORY ABOUT LAND TRUSTS:
Attorneys for the Federal Government (FBI/IRS) along with local law enforcement agencies spent Millions of Dollars and 40 YEARS trying to pierce through the elaborate veils of Trusts involving the infamous Chicago Ganster: AL CAPONE.
These Agents ONLY SUCCEEDED when they talked his CPA into giving up the secret code and financial treasure maps of the King-Pin revealing enough secrets to jail him for Tax-Evasion...
Enlight of his history of Murderous Racketeering!
Kevin,
I believe you are referring to the Garn St. Germain law prohibiting the lender from invoking the due on sale clause when a homeowner transfers title to a living trust for estate planning purposes.
I am inclined to take a narrow interpretation of this law and suggest that this law only protects the owner-occupied homeowner. I suspect that when investment property is involved, the lender could argue that they are within their rights to call the loan due.
Quote:
If it [LLC] is declared as a disregarded entity than you wouldn't have seperate tax returns, right? So would be easier for some one to sue you for your personal assets. If that were the case than it would almost defeat the purpose of forming the LLC.
ParamountCaliber,
We form the LLC to shield our personal assets from a lawsuit arising out of our business activities. As a general rule, personal liability does not attach to the members of an LLC. Your liability in a lawsuit arising out of your LLC's activity is limited to the extent of the assets owned by the LLC -- hence the name: Limited Liability Company.
As Taxjunkie suggested, check your state's laws for specific details.
If your liability in a lawsuit arising out of your LLC's activity is limited to the extent of the assets owned by the LLC, then why would a trust be extra protection? If you form a land trust, with the LLC as the trustee, then you personally still have beneficial interest. Since you personally have beneficial interest in the asset then how are you protected from a lawsuit? Let's say there were some bad wires in one of your rental units and your tenant got badly burned. His lawyer would look up the title, see the trustee as the LLC and then look up the LLC and see you as the registered agent for the LLC. They would also see the mortgage under your name if they ran a credit check. Since you are the beneficial interest in the property, could they not sue you for everything you own?
I understand that if the LLC owned the property, they could only sue the LLC for what the LLC owns. In the case of the trust, the LLC is only the trustee, so it would seem that they would sue you personnally. <IMG SRC="images/forum/smilies/icon_confused.gif"> [ Edited by ParamountCaliber on Date 03/30/2003 ]
ParamountCaliber,
You are confusing the benefit of a trust with the benefit of an LLC.
A trust does not give you any asset protection. A trust does, however, provide some measure of anonymity.
The LLC gives some measure of asset protection in that it shields your personal assets from exposure to a lawsuit arising out of the LLC's business activities.
Think of the trust as being the cloak of invisibility. If it is not readily apparent that you own a lot of property, because it is all held in trusts, then you may not appear to have deep enough pockets to warrant the time and expense of a lawsuit.
Once you are discovered however and the lawsuit is filed anyway, the LLC is the suit of armor that protects your personal assets from attack.
Someone with legal expertise will have to answer the question on the advisability of having your LLC as both the trustee and the beneficiary of your trust. Perhaps you should pose this question in the Legal Forum.
Hope this helps.