Buying a rental with brother, question about ownership

Houston, TX · Member since 2017 · 1 post · 0 votes

I am planning to purchase a rental property with my brother. We are a bit new but have done our research with regards to the property. We are fuzzy on the legal side and will probably consult with a lawyer but thought I would make a post here as well.

The down payment will come from his bank account and the mortgage and title will be under his name. We have agreed that we will split ownership and plan to form a LLC. I guess my first question is, can we simply declare in the LLC that I am 50% owner and I will be allowed to reap 50% of the tax benefits etc come tax time despite the mortgage/title not being under my name? Secondly, ignoring the other benefits of a LLC, is the LLC structure the best way or even necessary to achieve this? Thank you for all your help!

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David Lilley

Rental Property Investor · Dallas, TX · Member since 2016 · 261 posts · 170 votes

Look into holding the property as tenants in common. You and your brother will both create an LLC for yourself. Then, you will purchase the property as tenants in common (your LLC and your brothers LLC will share ownership). This way if you want to do a 1031 exchange in the future you can take your individual profit and buy whatever you want and your brother can do the same.

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Investor · Scottsdale, AZ · Member since 2016 · 1k+ posts · 885 votes
9y
In Texas, an LLC is the best way to go for holding property. You should have the Property in the LLCs name, not your brother's. You both want to be managers. You need to have, in writing, what happens if one of you no longer wants the rental and how the other buys him out. You need to figure out who gets your share if you die. If you are 50% / 50% owners and you have a really bad Thanksgiving some year and aren't going to speak to each other, no one can sell without the consent of the other. If you have 51% 49% the one with 51% can sell on a whim. So, figure out the worst case scenario so your relatives won't have to figure it out after you die. I had a friend who was one of 6 who inherited a farm in North Dakota. Four wanted to sell and 2 wanted to keep the farm. Ten years later they finally got the two to give in. Thanksgivings were a tough event.
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David Lilley
Rental Property Investor · Dallas, TX · Member since 2016 · 261 posts · 170 votes
9y
Look into holding the property as tenants in common. You and your brother will both create an LLC for yourself. Then, you will purchase the property as tenants in common (your LLC and your brothers LLC will share ownership). This way if you want to do a 1031 exchange in the future you can take your individual profit and buy whatever you want and your brother can do the same.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
9y
@Ray Leong, There's a number of issues you'll need to really nail down - what exactly is your goal liability and management wise and what lending issues will you get into if you want to place the property into an LLC post funding. There's ways to set up a joint management agreement. Or start an LLC simply as a management company simply to be the manager for that property without owning it.
@David Lilleys right on with his recommendation for tenants in common as the easiest way to use the 1031 if you want to ever separate and go your separate ways. If your brother remains the only one on title then he is the tax payer for that property. He will be the only one who will be doing the 1031 exchange. If you contribute into an LLC with both of you as members then that LLC becomes the tax payer so the LLC has to do the exchange. There's no problem with that. But if you are both tenants in common then you can 1031 your portion and he can 1031 his portion either separately or together with you. It just adds flexibility.
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Bill ExeterBusiness Member
1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
9y
Hi @Ray Leong,
The first thing that you need to do is determine what your exit strategy is going to be so that you can determine how to hold title to the property. @David Lilley is right on the money. Tenants-In-Common ownership will give you the flexibility to 1031 Exchange into the TIC and also 1031 Exchange out of the TIC, but if you set-up a two (2) member LLC you will be treated as a partnership and selling and exchanging individually gets more complicated; sometimes impossible. The driving factor should be what your exit strategy is.
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