Transferring current properties into an entity

10 Replies

Hello BP world,

By continuing my education process, I will also continue with questions since everyone has been amazing and helpful so far. 

I currently have 2 rental properties and wanted to throw some legal questions your way. Should I transfer the properties into an entity and if so, which entity do you recommend? I will also be doing my first rehab in 2015, should that be under a different entity? 

Who is the better go-to for entity consultation, accountant or attorney?

Thanks in advance,

Damir Kamber 

@Damir Kamber

What is your reasoning for putting your 2 homes into an entity? The most common is an LLC. If your looking for more protection then just get an umbrella insurance policy, this will add even more coverage for your protection which is what people are thinking when going the LLC route.

I'm with Curt... you'd have to set up a separate LLC for each property to get the coverage you really want, you'd have to have separate checking accounts for each LLC to keep the funding independent... and make 1 little mistake and the veil of the LLC is pierced and it's worthless. You also have the recurring costs of keeping the LLC open.

Insurance is pretty cheap and makes for an easier life.

Get insurance... do the right things by your properties and tenants to minimize any reason to sue you... and you're good to go.

Hi @Damir Kamber  ,

I would advise that you speak to both your RE Attorney and your Accountant who can advise you what is best for your business goals and objectives. Generally, an LLC is for asset protection and this entity is probably the best vehicle to place your RE properties in. It gives you both asset protection and tax benefits, since it is taxed like a partnership. Never use a C Corp for your RE since that will create a double tax, once at the Corporation level and again at the distribution level (monies passed from the C Corp to you).

You can transfer all of your properties under one LLC or use separate LLC's for each property, but again make sure you speak with your Attorney/Accountant who can explain the pros and cons of doing so. There really isn't a one size fits all answer, and you need to set up your business to align with your current and future goals.

Happy investing,

Mike

Besides the possible protection, isn't there more tax benefits one gets out of having these properties in an entity? This would make it a business, which has more advantages, right?

A big reason I have property ( a few multi-families) in an LLC is anonymity. Leaving a title trail of QCDs as you transfer to the LLC defeats that purpose. Tax-wise, LLCs and S-Corps are pass-through, so no real $$ advantages tax-wise. Convenience-wise, I like being able to do my mileage through one mgt corp instead of every individual property, for instance. With a business, there is also the advantage of establishing a defined benefit retirement plan when you start making real money, but for most 'average joe's', you will be fine being insured and transacting yourself in a proper manner. Establishing a separate entity for each property is asking for a tax prep and paperwork nightmare in my opinion. I already have to file multiple returns (don't forget state quarterlies) and maintain multiple cking accts for my 2 little businesses. Can you imagine every little house?

Great stuff everyone, thank you so much for all your advice. I will keep you all posted as I continue with my journey. 

Damir 

Originally posted by @Nicole W.:

Besides the possible protection, isn't there more tax benefits one gets out of having these properties in an entity? This would make it a business, which has more advantages, right?

As far as rental properties are concerned, a pass-through business entity is generally tax neutral.  That is, the tax liability is the same whether or not an entity is in place.

For property flipping, there is a point where an S-corp will shelter some income from self-employment income taxes, but, there are no other tax benefits to be gained by having the S-corp versus doing business as a sole proprietor. 

This is very helpful. I was thinking of the same question.

I don't recommend an LLC for the rentals because it doesn't offer really more protection than an umbrella policy. Here's an article that breaks a lot of it down (be sure to read the comments too, as they are more helpful than the article really)-

http://www.biggerpockets.com/renewsblog/2013/08/17...

As far as the flipping, you wouldn't want that to be the same LLC as the rentals (if you go that route) because there is a huge differentiation between "active income" (flipping) and "passive income" (rentals) and if you have crossing income types in one LLC, it messes things up.

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