Buying an LLC that owns real estate
Member since 2020 · 3 posts · 9 votes
Buying an LLC that owns real estate
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Accountant · NH · Member since 2019 · 269 posts · 288 votes
2yKeep it simple.
With real estate it almost never makes sense to acquire LLC units over acquiring the assets.
When you acquire LLC units, you are also acquiring any unlisted liabilities of that LLC - say someone had a trip and fall 3 weeks before you bought it, and then they sue the LLC a week after you close on the purchase... now it's your problem. There are some states (like NH) with some unique issues as well about the step up in basis of the underlying asses - where you could end up inheriting their state tax liability. You may also be acquiring leases that you don't want to be stuck in.
Generally if you acquire LLC units, you will be able to at least get a federal basis step up in the underlying assets.
Also generally when you acquire LLC units, most states still trigger real estate transfer taxes. State pending, this could also trigger the re-assessment anyways.
So if you want to get creative, make sure you hire some competent attorneys to advise you. My recommendation is unless there is a REALLY good reason for doing LLC units instead...just buy the assets.
6 Replies
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
Quote from @Galen Miller:
I'm under contract to purchase an apartment building in Ohio. I have the option to purchase the real estate or to form an LLC, transfer the property into it and purchase the newly formed LLC that owns the real estate. The primary motivations for purchasing an LLC that owns the real estate is to avoid the potential of a significant property tax increase and to eliminate conveyance fees. My question is whether this will this cause issues with setting up the purchase price as the cost basis and depreciating the property accordingly? I've seen some stuff online that suggests I might assume the previous owners depreciation schedule (which would be bad because they've owned it a long time). I also came across a 754 election which is one process for adjusting the cost basis to the purchase price. Any advice on this issue is greatly appreciated! Thanks!
Definitely want to speak to a tax professional and an attorney on this one as I believe you are correct in that you would be buying the current depreciation schedule so your basis will be much lower from the outset. Also nothing will stop the county from coming in when the see the LLC transfer and assess new tax valuations.
7e investments53 Reviews - 2yRemington LymanBusiness MemberReal Estate Agent · Columbus, OH · Member since 2017 · 6k+ posts · 7k+ votes
Quote from @Galen Miller:
I'm under contract to purchase an apartment building in Ohio. I have the option to purchase the real estate or to form an LLC, transfer the property into it and purchase the newly formed LLC that owns the real estate. The primary motivations for purchasing an LLC that owns the real estate is to avoid the potential of a significant property tax increase and to eliminate conveyance fees. My question is whether this will this cause issues with setting up the purchase price as the cost basis and depreciating the property accordingly? I've seen some stuff online that suggests I might assume the previous owners depreciation schedule (which would be bad because they've owned it a long time). I also came across a 754 election which is one process for adjusting the cost basis to the purchase price. Any advice on this issue is greatly appreciated! Thanks!
You are not purchasing their LLC, rather a newly formed LLC. I have not had any issues with doing this on my taxes but I would make sure you consult your account and attorney on this matter.
- Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes2y
Quote from @Galen Miller:
I'm under contract to purchase an apartment building in Ohio. I have the option to purchase the real estate or to form an LLC, transfer the property into it and purchase the newly formed LLC that owns the real estate. The primary motivations for purchasing an LLC that owns the real estate is to avoid the potential of a significant property tax increase and to eliminate conveyance fees. My question is whether this will this cause issues with setting up the purchase price as the cost basis and depreciating the property accordingly? I've seen some stuff online that suggests I might assume the previous owners depreciation schedule (which would be bad because they've owned it a long time). I also came across a 754 election which is one process for adjusting the cost basis to the purchase price. Any advice on this issue is greatly appreciated! Thanks!
Hello Galen,
I would highly suggest not trying to get super creative here and just form your own LLC, buy the property and put it in there, and write this one off as a win! This tried and true strategy is done all the time for a reason! Best of luck in your real estate journey and congrats on the new deal :)
- 2yJason WatsonBusiness MemberCPA · Colorado Springs, CO · Member since 2024 · 98 posts · 83 votes
Totally agree with the posts above. When you buy an entity, you are buying their history, warts, etc. including depreciation. There are times when you can elect a "stock" purchase to be treated as an "asset" purchase allowing you to reset depreciation.
At times you do a stock purchase (buying the entity instead of buying the assets) when assets are immovable such as a Medicare Cert or a defense contract, or some other intangible. There are are other reasons, but those are the biggies.
Like Zachary said, keep it simple.
WCG CPAs & Advisors4.598 Reviews - 2yArn CenedellaPro MemberRental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes
Three words - be careful here.
The big issue is liability here.
You have no idea what is going on with the seller LLC.
Does the LLC have (unsecured) debts against it? Title insurance ensures real property title not title to LLC. Are there ongoing claims against the seller LLC? A tenant trip and fall case prior to close? Unpaid vendor liens?
And an immediate transfer into a new LLC may not protect you since you still will own the seller LLC.
I know investors do this kind of thing to save on property taxes. But if the county re-assesses every 3 or 4 years, you will pay market prop taxes soon enough.
I’ve been an investor for 46 years and this is NOT something I would do.
Over this time, I have seen investors get themselves in trouble by being “too smart by half” often with creative tax structures that end up causing trouble but this is a another danger zone in my mind.
I’d think long and hard before embarking on what you propose.
If the acquisition doesn’t stand in its own merits and one needs to resort to chicanery to make it work maybe it’s not a deal.
just my two cents.
good luck,
Arn - Accountant · NH · Member since 2019 · 269 posts · 288 votes2y
Keep it simple.
With real estate it almost never makes sense to acquire LLC units over acquiring the assets.
When you acquire LLC units, you are also acquiring any unlisted liabilities of that LLC - say someone had a trip and fall 3 weeks before you bought it, and then they sue the LLC a week after you close on the purchase... now it's your problem. There are some states (like NH) with some unique issues as well about the step up in basis of the underlying asses - where you could end up inheriting their state tax liability. You may also be acquiring leases that you don't want to be stuck in.
Generally if you acquire LLC units, you will be able to at least get a federal basis step up in the underlying assets.
Also generally when you acquire LLC units, most states still trigger real estate transfer taxes. State pending, this could also trigger the re-assessment anyways.
So if you want to get creative, make sure you hire some competent attorneys to advise you. My recommendation is unless there is a REALLY good reason for doing LLC units instead...just buy the assets.
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