Buying an Limited Liability Company (LLC)

Question of the week:

“An investor once told me that a way to avoid the property tax increase upon the sale of the Self Storage Facility is to have the seller set up an LLC, transfer the facility out of his old LLC into the new one, and then you buy the LLC and all its assets. Can you comment or expand on that, as property tax increases could kill a potentially good deal once I buy it and the taxes go up” Anonymous

My Reply:

You know, Benjamin Franklin once said that there are two things in life that are certain: Death and Taxes. Yes I hate taxes, and I’ll do anything in my power to avoid paying them unnecessarily and to lower them in all facets of my real estate investing career and in my personal life. And I gotta tell you, it’s been extremely tough going under the current administration. But in answer to your question, Yes, I am aware of people who have used this strategy for buying properties for purposes of avoiding an increase in taxes, and/or to step into the seller’s shoes and continue paying on the note due to their inability to place a new 1st mortgage on the property.

The sticky part is the Deed, and the manner in which it is handled in this type of a transaction. Once the deed passes the table at closing, and is recorded, yes, you may incur an increase in taxes. However, the proper way to handle the transaction, and the safe way, if FOR the deed to pass across the table – that way you know it’s yours. I don’t recommend buying an LLC with an “interest” in the real estate at any stage in your investment career. That type of arrangement is far too risky, in this investor’s opinion. And as for the taxes, well, see Ben’s statement above. Just make sure that you account for an increase in the taxes post-acquisition and use that figure for your ongoing tax expense during your ROI or NOI calculations to be certain you aren’t unpleasantly surprised once your taxes have been reassessed.

Thanks anonymous.