Personal Ownership ---> LLC

9 Replies

I am looking to purchase a 3 unit property and live in it and rent out the other floors. If I end up moving out and just use it as a investment property, am I able to file for LLC? Can I file for it while I am living there?

Just looking to see what my options are when I am living there/not living there.

Thanks

You are able to move a property into your llc from being personally owned. A big risk you face though is if you still owe on the property, you may get taxed on the debt forgiveness even though you are the one owning the mortgage in the llc. Definitely read llc for dummies as they break down all of the ways to use llc for real estate and the big mistakes. Also verify your plan with a lawyer / accountant to make sure you don't accidentally tax yourself. 

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@Robert P. it doesnt matter whether or not you live in the property. Title can still be held in an LLC. The problem with it being owner occupied is that you dont get the tax benefits associated with rentals for your unit. You can only deduct 2/3 of all building expenses such as roof repairs and repairs/maintenance on common areas. You can still deduct 100% of taxes and mortgage interest but only 2/3 of allowed depreciation. If you transfer the deed into an LLC it may trigger a due on sale clause and the bank could theoretically call the note.

I have never heard of the debt forgiveness tax situation. The only time that would come into play is if the mortgage company forgives your debt but I dont see why they would do that. I would gladly pay income tax on the balance of my mortgages if my loans could be forgiven. Maybe @Brian Ky can explain further.

@Rob Beland has good advice you could trigger due on sale clause of your mortgage. While this rarely happens several people have posted that it is becoming more of an issue. I moved property from one LLC to another. And when the note came up for renewal because it had a five-year arm the bank wouldn't renew it because the mortgage was different than who held title. Also I've heard of banks freaking out when the insurance is in the name of an LLC which does not match name on your mortgage.

Lastly depends on your state but you might have doc stamps or other transfer taxes when you transferred to an LLC

Why do you want to put it in an LLC?

As others have mentioned, banks don't like having a loan with you, but property owned by a company. They don't see it as the same person but instead separate entities. As such they may compel you to transfer the loan from your name to your company's name. This is where the debt forgiveness may kick in as you personally lost the loan debt. The government doesn't understand moving money from one pocket to another. 

If you intend on going to an llc consider starting the purchase that way. You will get push back since your company has no incom or credit score. Therefore Co sign the loan as a person. You get the same loan but in the llc to begin with. But again, work with your bank telling them what to do and get a lawyer or tax accountant that can explain your situation and work on a best plan. 

Originally posted by @Brian Ky :

As others have mentioned, banks don't like having a loan with you, but property owned by a company. They don't see it as the same person but instead separate entities. As such they may compel you to transfer the loan from your name to your company's name. This is where the debt forgiveness may kick in as you personally lost the loan debt. The government doesn't understand moving money from one pocket to another. 

If you intend on going to an llc consider starting the purchase that way. You will get push back since your company has no incom or credit score. Therefore Co sign the loan as a person. You get the same loan but in the llc to begin with. But again, work with your bank telling them what to do and get a lawyer or tax accountant that can explain your situation and work on a best plan. 

If you're the sole owner of the LLC, the government does not even see that there are two entities. The LLC is a disregarded entity, and all of the income and loss are treated as though directly attributed to the individual.

I don't see how debt forgiveness is going to play a role here. The bank isn't going to forgive anything. If they trigger a due on sale clause, they will demand you pay the full amount owed. If you can't, they will foreclose on the property. I agree that transferring a property with an outstanding mortgage to an LLC can be risky proposition. We purchase properties in an LLC and get financing through the LLC. The banks typically require a personal guarantee of the debt though. If the LLC owns it, it will be a commercial mortgage, which typically has higher rates and is often a short-term loan (5-7 years being fairly typical, though longer terms can be found) with a balloon payment at the end.

Originally posted by @Bob B. :

Why do you want to put it in an LLC?

I would only want to do it if I start to buy other properties so I can protect myself. But the house I am buying now will be one that I will be living in to begin with. So wanted to see if i could transfer it over to an LLC as I see myself buying another property within the next 30 years

Why worry about it at this point? You can put it into a trust as step one after you own it and that won't trigger the due on sale clause under the Garn Act. Later you can make the LLC the owner of the trust. Just one point here, due to court rulings I would make your LLC a multi-member one.

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