Transferring Property from my LLC to a S Corp?

12 Replies

My husband and I jointly own 3 buildings with residential financing in our personal names. We also own 15 buildings (50/50) in our LLC.

The problem we are running into is that our investment properties with residential financing are sitting at about a 50% LTV, and we can't do a cash out refi because fannie/freddie recognizes the LLC properties so we can't have more than 10 or do a cash out refi once we get 5.

If we had the LLC properties in a S Corp then fannie/freddie wouldn't count them. So we are considering moving them all over to one. I read up about S Corps and don't see that much of a difference. What am I missing?

HI Brie, You are missing almost nothing different. The reason LLCs were created (so I am told, I am no lawyer), is so you can have ownership and payouts at different percentages e.g. I manage a fund, I have a 51% ownership share but pay out 75% to the other investors. With a C or S corp profits must be distributed inline with ownership shares.

Hope this helps.

@Judah Hoover  - It does, thanks!  I read up on it and don't really see it being much of an issue for us personally, it is still a pass through taxation and we would need to do minutes.  But being locked out of our equity is much more of a headache 

Google s-corps & the advice against the transference of real property is overwhelming.

Why not hide them in the proverbial Illinois land trust?

Originally posted by @Pat L. :

Google s-corps & the advice against the transference of real property is overwhelming.

Why not hide them in the proverbial Illinois land trust?

 I am not too familiar with land trusts... and these properties are in WI

Also tax implications when transferring from entity to personal during refinances .. Llc usually u are fine but with a scorp it can be considered a sale .find yourself a nice community bank or portfolio lender who will do business with u..u have a track record to show them

Disclaimer: I am not an attorney, nor am I an accountant.

Be very very careful when doing this.

There are some weird accounting/ tax rules about transferring property to C-corps (and S-corps).

With S-corps you also run the risk of messing up the taxes, and having the IRS treat the entity as a C-corp (which could be absolutely devastating). 

Definitely consult with an attorney and CPA.

Check out this article.

http://www.forbes.com/sites/anthonynitti/2014/01/2...

Also, maybe check out the last BP podcast with Scott Smith. He outlined a couple creative strategies for holding larger portfolios of rentals. 

Justin - we would just be transferring the LLC properties to a S Corp to avoid them being recognized by fannie / freddie. Our personal properties will stay in our names.

@Patrick M. -  Thanks for the article.  It is a bit above my head so I will defiantly talk it over with my CPA, Probably after tax season as this is not an immediate issue

@Brie Schmidt  

Jean Norton is a proponent & would be a good source of information.

@Brie Schmidt On the surface they are similar in many ways but there are restrictions in connection with S Corps and they also generally require more administration, (annual minutes on file etc.). I would also evaluate the tax implications you might have over each entity structure as well. Your attorney or CPA should be able to guide you best since they would be familiar with your current business structure. This is my 2 cents on LLC (multi-member) vs. S Corp as entities, however not specific to any one individual or business, just in their generic form...

  • Both generally protect members and shareholders from personal liability for the debts and obligations of a business. However a single member LLC may not protect the owner from creditors.
  • For tax purposes an LLC can file as an S Corp (file S election w/IRS first)
  • No upper limits on the number of LLC members, S Corps up to 100
  • No restrictions on LLC ownership interests (flexible), an S Corp can have only 1 class of stock but can have differences in voting rights
  • Special allocations in income, gain, or loss in an LLC is permitted but not in an S Corp they allow pro rata allocations because of the stock
  • In regards to distribution and contribution of property (not cash) an LLC may have tax advantages over the S Corp. The LLC usually doesn't recognize a gain or loss until the member disposes of the distributed property. With an S Corp, distributions of appreciated property are treated as a sale by the corp causing pro rata recognition at the shareholder level.
  • It's easier to pass through tax losses to LLC members than to S Corp shareholders because of favorable rules relating to the tax bases of LLC ownership interests.

This isn't an all-inclusive list but wanted to show you some of the differences. Hope this helps :-)

@Brie Schmidt  One item to note, I sort of touched on in my earlier post where I mentioned the distribution and contribution on property but thought I should outline a bit more...

Because you have financed properties (if I understood correctly) you want to be very careful about moving those under the corporation. Reason being...with an LLC you can quit claim or warranty deed a property from personal to LLC after financed with Freddie/Fannie. However, if you want to put the financed properties under a Corp you actually have to sell to the corp the property. If ever the mortgage company wants to perform an audit they can call the note. Essentially by selling the property to the corp the note should have been paid off. So the mortgage company will be looking for their payoff. If it's in an LLC you didn't have to sell the property to get it there so it's no issue.

@Janet R.  - Sorry, I am just seeing this post.  The second point you made might actually solve all our problems:

  • For tax purposes an LLC can file as an S Corp (file S election w/IRS first)

Our properties can be in the LLC - but it will cause us problems if they are on our Schedule E. So I will look into the S Election.

As far as your second post, the bank said it would be no problem transferring the note, but the S Election may save us from all that.

BTW - I was in San Antonio for a few days last fall, we really loved the city!  It had a real cool vibe to it and we are looking to come back.  

Originally posted by @Brie Schmidt :

@Janet R. - 

BTW - I was in San Antonio for a few days last fall, we really loved the city!  It had a real cool vibe to it and we are looking to come back.  

 Wonderful! Would love to connect if you are in town.  Have a great weekend!

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