Joint venture vs LLC to avoid transfer taxes?

Question

A relative of mine in the DC area is moving to bigger home, but the condo he currently owns (with a 30 year conventional mortgage) is in a gentrifying area that has a lot of upside. He doesn't have the capital to put a down payment in on his new home and keep the current condo. One thought we had is that we go 50-50 on the equity of his current condo and transfer the condo to an LLC. We checked with the mortgage company and as long its a 51/49 split it won't trigger the due on sale clause. In doing our homework, however, we realized that we will have to pay the 2.9% transfer tax once it's transferred to an LLC.

The main question is whether there is a way to avoid the transfer tax? Can we create a joint venture and leave the title in place with him as the owner? If we do that, will I be able to share in the tax benefits?

Thank you!

P.S I'm a newbie and don't have any real estate investing experience.

The main question is whether there is a way to avoid the transfer tax? Can we create a joint venture and leave the title in place with him as the owner? If we do that, will I be able to share in the tax benefits?

Thank you!

P.S I'm a newbie and don't have any real estate investing experience.

Russell Brazil · Answer

No way to avoid transfer tax.

Account Closed · Answer

Your Comment: "A relative of mine in the DC area"In some states, you can avoid the transfer tax if it is to a relative for "love & affection". I'm out west, where states tend to be a bit bigger, but when I look at "the D.C. area" I see half a dozen different states. Check the state that the property is in and see if that exemption applies. Call a title company and ask.

Nikunj Chauhan · Answer

Thanks all. Really appreciate all of your thoughts!

Jack Seiden · Answer

No way to avoid the tax legally, as an aside when you transfer title you need to change the insured property owner to the new llc, I’d really double check with the bank the are ok with ownership being transferred without calling the loan because as soon as change insurance it will alert the bank. If he has lived in the property in 3/5 years he can sell with no cap gains taxes and use that equity for a larger down payment which might help with rates where they are, so if definitely at least consider that option,  although the condo market in dc is pretty tough right now.

James Kim · Answer

Not a transfer tax expert but i do know that there are states that assess the tax on any transfer in any way, there are those that assess it if you transfer to and out of an entity, and there are those that assess if you transfer a controlling interest. For DC i believe they assess if you transfer (and by this i mean convey, grant, sale, assignment etc. directly or indirectly) a controlling interest (i believe this means anything above 50% though you'll need to double check the definition) during any 12 month period preceding the transfer. if you're forming a 51/49 partnership and you're getting 49 then you may be able to avoid the tax because the original owner is not transferring a controlling interest but rather only 49%. You may be able to do this because the 51% owner is deemed to only have transferred 49% by looking through the partnership and be viewed as still retaining 51%.

This isn't legal or tax advice, so you should check with a transfer tax specialist.

Hope this helps.

James

Joint venture vs LLC to avoid transfer taxes?

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