Help getting a LLC - Yes or No?

Question

Hello everyone!

I am signing today to sell one of our live in flips! I will be using the proceeds to possibly buy a great cash flowing duplex close to our current house. As of right now, all the properties we have purchased have been in our personal names. I plan to stay in real estate long term, so I started thinking about putting all new properties in a business LLC for added protection. Also, to run the operation more like a business. Here are my questions and any responses would be greatly appreciated!

1. Would setting up the LLC be ok to do just do through legal zoom? or should I have a someone taking care of it?

2. How long does it take to get set up? I want to possibly make an offer in the next week on this duplex!

3. If I 1031 exchange a property, can I move it from my name to the LLC at that time? It would still be like for like as far as the rental is concerned.

Thanks,

Sai

Sai Kopacek · Answer

This is all very helpful information @Katie Lepore @Simcha Davidman @Michael Skoczylas and @Dave Foster!! I am very happy we have this great organization of people who can reach out to!!

Simcha Davidman · Answer

@Sai Kopacek you may be able to transfer the property into the LLC (again, risking the due on sale clause, and any local transfer taxes/fees) and then sell it, and you should be able to use the 1031 exchange. But you should speak with the 1031 agent (and/or attorney, accountant) before you do anything.

Michael Skoczylas · Answer

@Sai Kopacek If I understand you correctly - you would like to transfer your current rental to an LLC and then 1031 it.

If the LLC is a single member LLC it will likely be considered a disregarded entity for tax purposes- which means for 1031 purposes you are still the Exchanger. If you transfer to an LLC then 1031 right away some practitioners might shy away from that because some states may say that the LLC did not hold for investment purposes (Personally, this would not bother me). But if you either exchange as an individual, then buy your replacement property in a single member LLC for 1031 purposes it is the same. Also, if you transfer the property to the LLC now and then exchange down the road no one should have an issue with that.

If I misunderstood any of your intentions please let me know so I can update.

Dave Foster · Answer

@Sai Kopacek, from the 1031 perspective the tax payer for the old property must be the same as the tax payer for the new property.  So if you are the owner personally of the property right now (and by that I mean that the activity of the property is reported on your tax return) then you are the tax payer and you have to be the tax payer for the new property.

There's a couple of different ways to handle your desire to start an LLC.  It is going to depend on your and your accountants druthers and the lenders of course.

1. An LLC that has one member and chooses to be taxed as a sole proprietor will not file a tax return.  All activity of the property owned by that property will be reported on your personal tax return.  In that event you are still the tax payer for federal purposes since the tax return has not changed.  So you could sell as yourself and buy as that "disregarded LLC" if you choose.  Because deeding is a state thing and the IRS does not look at that.  They look at the tax return.  I always recommend that the deed match as closely as you can to eliminate questions but this would be a permissable way to handle your 1031.

2. You could sell as yourself and 1031 and buy as yourself and then after the fact contribute the property into an LLC.  This is perfectly fine from the 1031 perspective.  As someone mentioned make sure this is OK with your lender.  And work with your accountant.  But contributions into an entity are not taxable events generally.

Optics are more in your favor with option 2.  But option 1 eliminates any lender issues.

Katie L. · Answer

@Sai Kopacek

Depends on a number of things.  How confident do you feel that you will actually be sued sometime in the future?  If you think it's possible, you may want to have an attorney look at or draft your operating agreement.  There are certain ways of structuring provisions that increase your protections from creditors.  Do you ever think you would have multiple owners?  If so, you may want an attorney to draft the operating agreement to provide for possible plans and ways to settle disputes that could arise later down the line.  If you are solely looking to have the LLC name on title then perhaps LegalZoom is sufficient.  You get what you pay for.  If you're looking to do it right, then, do it right.

Are you planning on forming in CA?  Usually setting up the actual LLC with the Secretary of State doesn't take too long, though there are multiple other steps part of the formation process and documents you will want to sign but sometimes they can be signed at separate times.

With regard to the 1031 exchange, you want to be very careful with you do with title and the time period between these steps.  Definitely something to talk with a professional about before you make any moves.  Also, if any of these properties are encumbered, you may want to look into due on transfer clauses in the mortgages.

This article may help you some: https://www.mmpph.com/wp-conte...

*This post does not create an attorney-client or CPA-client relationship.  The information contained in this post is not to be relied upon.  Readers are advised to seek professional advice.

Jaysen Medhurst · Answer

@Sai Kopacek:

• Sure you can use Legal Zoom or a similar service, but it may be worth the expense to have an expert guide you (at least on the first one). You want to make sure it's set up and (just as importantly) maintained properly. If you don't, that leaves you open to liability in the future.
• Very quick to set up. Only a few days in my state. When you make the offer put "Sai Kopacek or designated entity" as the buyer. You don't need to have the actual LLC set up when you make the offer.
• I'm not sure what you're asking here. If you 1031, you're selling the property. So why would you move title into a LLC at that point?

FYI: I'M NOT A LAWYER, so make sure you talk with one. Every state (especially CA!) has their own rules around this kind of thing.

Simcha Davidman · Answer

Hi @Sai Kopacek

Congrats! Please do not construe this to be legal advice :)

1. You can probably get away with legal zoom, honestly. You probably don't even need that - there are companies that specialize in just setting up entities. Just google "set up california llc" or something and you'll get lots of hits. I am not vouching for them, but for what you need, it's probably ok.

Assuming you have an accountant, you should run this all by them, not so much for legal purposes but to make sure the entities are nested and/or related properly.

2. With these online vendors, it's usually as fast as your state allows. I've seen as little as 24 hours and up to a couple weeks. But don't let that stop you from starting the process and making offers simultaneously. I don't recommend making an offer in the LLC name you're trying to get, but make it in your own and then before executing the contract have it changed, or have language "and assigns" or something included.

3. What do you mean? Sell the property in your own name and then buy the property in your own name and then move it to an LLC? Or do you mean sell the property in your own name and then buy the new property in the LLC?

I think the first one should be fine (again, not legal OR tax advice), but you can get hit with transfer taxes or fees for the transfer, depending on your state. If you're financing the property, this type of transfer could most likely trigger the due on sale clause, although it's generally uncommon that  bank would call the mortgage because of it. But I think it is a risk that you need to be aware of.

If you mean the second option, that would trigger a capital gain - the buying entity (including all owners, as far as I'm aware) needs to be the same name as the selling one. But hopefully someone smart with 1031 flagged as a keyword will chime in here :)

Sai Kopacek · Answer

Hey @Jaysen Medhurst and @Simcha Davidman  thanks for the great advice!

On #3 - I have another rental that would have to be 1031 exchanged so we can defer capital gains. I just wanted to know, if when I set up the LLC and it came time to do the 1031 exchange on the property. Would I be ok buying another rental but not in my name but through the LLC?

The rental we purchased about 8 years ago in our name (personal). It has doubled in price now but it would be much better in the LLC if that is the way we go. I just wanted to see if that would trigger the capital gains even though we are doing the 1031 exchange? I hope that makes a little sense?

Help getting a LLC - Yes or No?

Most Popular Reply