LLC formation and growth while protecting personal assets

Jeffrey Vanicky · 2021-09-18T09:19:51-07:00

Unfortunately I have no experience and limited knowledge in this field so if you looking for me to explain I am sorry. While listening to the bigger pockets podcast on my drives to and from work, I realized I jumped into real estate investing with not only zero experience but zero personal asset protection. Believing that sometimes the best way to learn is to jump right in, I was not that worried about learning on the go. It has now been a few months since I have bought my first fix and flip. As the time goes on and I consume more and more BP podcasts I realized I should have taken the time to do some due diligence to protect myself. I understood the numbers and the costs and thought that would be pretty much all I needed, I was wrong. Some of the due diligence that should have been done is how to protect my money and profits from lawsuits and taxes. Now I know that I should be speaking with a real estate lawyer, accountant, and financial planner, I just wanted to try to get some feed back and some questions that I should be asking. I have my primary residence that my family lives in with substantial equity along with the fix and flip house that we own outright, however the houses are not in an LLC. My wife and I were thinking that moving forward we would like to have more anonymity and personal protection. So QUESTION #1 We wondered if it was possible to wholesale our fix and flip to our own LLC and keep the profits in our LLC. QUESTION #2 We wanted to take the profits from the fix and flip sale and purchase our current house in the name of the LLC. We would sell the house, rent from our own LLC, and pocket some cash in our personal name. While the LLC would have instant equity with the purchase of the house at a cheap price. QUESTION #3 Since the LLC has profits from the personal wholesale would we be able to pay less taxes by investing in the house we bought from ourselves to renovate. QUESTION #4 Would it be a smart decision for the tax purposes of losing our personal home deductions in our taxes compared to the benefit of depreciation and others tax benefits with the LLC. I would love to have some feed back if any of this is legal and a smart decision being that we are looking to purchase buy and holds, multi families, and fix and flips in the future. Also I heard about the possibility of opening a series LLC to help.

Ned CareyPro Member

Moderator

Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes

5y

@Jeffrey Vanicky first to you and others please break up long posts. It is difficult to read a page full of text without a break.

1) it depends on how the LLC is taxed. It can be taxed as a pass through company which is the norm or default, or you can elect for it to be taxed as a C Corp. A C Corp is a VERY bad choice for holding real estate. - the reasons are a much longer answer.

If the LLC is a pass through company, then all the profits of the LLC get added to your personal return whether you take them out of the company or not.

If you are flipping houses as opposed to holding rentals you can save a little money on FICA tax (AKA self employment or Social security) bu setting choosing to tax your LLC as a subchapter S Corporation. Ask your accountant for details.

2) I doubt you will get any advantage to putting your personal home in an LLC. You will loose one big advantage of limiting capital gains when you sell your primary residence.

3) I don't quite understand the question but I seriously doubt it. Ultimately if you make earned income you are going to pay tax on it. Flipping homes or wholesaling are both considered earned (or ordinary) income.

4) I think you are assuming there are tax advantages to an LLC that don't exist. You don't get any more or less deductions for expenses and depreciation whether you do business as a Sole Proprietor (in your own name) or a separate entity

I am not a tax lawyer nor an accountant the above is my laypersons understanding of the law and taxes. This is not to be considered advice for your specific situation. There are a lot of complexities and you should speak with a professional.

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Jeffrey Vanicky

OP

Member since 2021 · 4 posts · 3 votes

5y

@Ned Carey thank you for all the great advice. New to posting on forums. I appreciate the feed back and will consider all points.

My Thought process is as follows:

I was thinking I can limit profits from the flip by renovating my permanent residence that was bought with my LLC. Not sure if it is possible or not.

If I have a loan in my LLC does that lower my personal DTI and allow me to get a personal loan to buy another house?

Gives credibility to my LLC having a house with equity and season the loan a bit so I could get some more loans in my LLC.

Adding anonymity to our families assets.

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Ned CareyPro Member

Moderator

Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes

5y

@Jeffrey Vanicky Limiting profits from your personal residence in an LLC. - NO the exact opposite will happen. All the profits will be taxed. If it is your personal residence in your name, you get a capital gain exclusion to shelter some of the profits.

Regarding DTI. Since you will be guaranteeing the loan for the LLC it will be included in your DTI

Regarding giving your LLC credibility. Possibly but not much. Especially when you are new, but even now for me with 15 years experience, every loan has to make sense and meet certain financial criteria. You are going to have to have skin in the game (some money in the deal). When you refinance you are going to have to meet loan to value (LTV) requirements and well as cash flow requirements

Again the above are generalizations, contact professional and your lenders for more specific details.

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

5y

the best tax treatment in the US is the tax FREE sale of a personal residence up to 500k for married 250k single ..

so if you have appreciation to lose a tax free situations does not make a lot of sense to me..

plus for two properties I think your really over complicating this.

LLC with wife and you is reported on your personal returns LLC does not pay tax.

AS for asset protection depends on what type of assets you have to protect so on and so forth.

Generally speaking on your personal resi good insurance and nice big umbrella will work 99% of the time.

AS your estate grows for sure there are methods that will help you with Trusts being one of the better ones from what I have seen

But to do it properly is 15 to 50k and then you have yearly maintenance and such.. So when you get to that multi million in cash or true equity might be worth it at that point..

If your fix and flipping your paying tax.. no way to get around it. One way though some do it is fix and hold for 18 months or so as a rental never put it as inventory on your tax return then sell and 1031.

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Frank Chin

Investor · Bayside, NY · Member since 2017 · 1k+ posts · 1k+ votes

5y

@Jeffrey Vanicky

One other issue in putting your home in an LLC is you'll lose your homestead exemption, which in some states, such as Florida, is far more valuable than an LLC.

I'm in NY, have my business in LLC, and advised by attorneys that you get sued anyway, for negligence in the event something goes wrong. If I don't shovel snow, there's a slip and fall, I can't say "too bad, so sad, you're out of luck, my house is in an LLC". The only way to protect yourself is good liability insurance, or get a PM with his own E&O insurance.

I bought a business from an S Corp owner thinking the S Corp would protect him, got $1 Millions liability insurance, was sued personally anyway for $3 million and the court refused to drop the suit against him personally. How did it turn out? He retired to Florida, bought a home with proceeds of the business sale, and was protected by the FL homestead law. The suit was settled with the insurance proceeds due to the homestead law.

He thought the S Corp protected him, wrong on that, but he knew nothing about homestead laws, and lucked out. My employees who was at the deposition hearings said the plaintiff attorney was shocked and dismayed to learn he moved to FL., banged on the table on hearing that, and gave up afterwards. I got a good laugh on hearing that.

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Jeffrey Vanicky

OP

Member since 2021 · 4 posts · 3 votes

5y

@Ned Carey @Jay Hinrichs @Frank Chin A huge thank you to all of you for the knowledge and feedback. I will be speaking with some professionals in the near future and I appreciate the information to give me a better understanding.

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Mya Toohey

Real Estate Agent · Tampa Florida · Member since 2013 · 630 posts · 303 votes

5y

@Jeffrey Vanicky

I am a Realtor and investor here in the Tampa Florida area.

We put our property in Land Trusts. Our LLC is the Trustee and we are the beneficiaries.

Land trusts can provide asset protection benefits by providing you with privacy of ownership for real property. Each piece of real estate can be placed into separate land trusts. If a lawsuit is associated with one piece of real estate, other properties titled to different trusts are not automatically encumbered.

Structurally, land trusts are similar to other types of revocable living trusts. There are three parties involved:

The grantor or settlor, who creates the trust and transfers property ownership to it.
The trustee, who manages the trust according to the specific wishes of the grantor or settler.
The beneficiary, who stands to benefit in some way from the terms of the land trust.

As the grantor or settlor, you would decide which real estate assets should be transferred to a land trust and what terms the trustee must follow in managing those assets. For example, if the trust includes a rental property then the trustee’s duties may include collecting rent payments, overseeing upkeep and maintenance and finding new tenants when the property is vacated.

The beneficiary is the person who benefits from the assets in the trust. So going back to the example of a rental property held in a land trust, the beneficiary may receive some or all of the rental income, depending on the terms laid out by the grantor.

As the grantor of a land trust, you can change its terms at any time. For instance, you can remove real estate assets from the trust or add them as you acquire new property; designate a new trustee or successor trustee if you’re unhappy with the current one; or give new instructions for how assets in the trust are to be managed on behalf of your named beneficiaries. If you end up selling all of the assets held in a land trust, you can terminate the trust altogether.

I hope that helps! Best of luck!

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LLC formation and growth while protecting personal assets

LLC formation and growth while protecting personal assets

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