Rental Property Investor · Stewartsville, NJ · Member since 2016 · 419 posts · 280 votes
Hi BP Community,
Just wanted to get some opinions on this question!
My wife and I own a vacation home in New Hampshire. We currently do not rent it out, and we are interested in moving it to an LLC. I am aware of the "due on sales" clause issue with moving a property into an LLC. Assuming that is not an issue, are there any tax reasons or potential tax impacts to us with doing this?
I think the answer is "no" as the LLC is treated as a pass-through entity, but wanted to get some other opinions on it.
Just recently, a new law was passed in NH allowing transfer to an LLC without transfer tax. This assumes that the ownership remains exactly the same. I think there are a few other caveats, I'd talk to a RE attorney.
The LLC is a passthrough entity by the IRS, but NH does not look at it the same. Until this law was passed, it was a big issue. But you need to make sure you are complying with the NH requirements.
If you have a mortgage on it, the due on sale clause will be a bigger issue, because you will need to switch to business insurance (your current insurance won't insure you if you own in an LLC), and the mortgage company will be notified of the new insurance policy with a different named insured. You then may have to get commercial financing, which is not as favorable as residential.
Business insurance policies are much more expensive than residential second home insurance.
All in all, it costs money.
If it's truly a vacation home, what's your reason for moving it to an LLC?
...not sure if putting it into an LLC is a 'transfer-taxable event' and if so, what number is that based upon? Good attorney/accountant question. If you're doing this for anonymity purposes, maybe a revocable trust makes sense - minimum transfer tax in NH of $40 and no-one can look up the beneficiaries of the trust to know who is behind it, which makes it more challenging for someone looking to sue you/take your assets. With any entity consideration, it's always good to consider things from 1) Insurance, 2) Taxation, 3) Legal, 4) Financing perspectives - would be fun to get your attorney, insurance agent, banker/mortgage broker and accountant together in a room and get the lowdown on S-corps, LLC's, trusts etc, to see how they consider each of these from their viewpoints!
Just recently, a new law was passed in NH allowing transfer to an LLC without transfer tax. This assumes that the ownership remains exactly the same. I think there are a few other caveats, I'd talk to a RE attorney.
The LLC is a passthrough entity by the IRS, but NH does not look at it the same. Until this law was passed, it was a big issue. But you need to make sure you are complying with the NH requirements.
If you have a mortgage on it, the due on sale clause will be a bigger issue, because you will need to switch to business insurance (your current insurance won't insure you if you own in an LLC), and the mortgage company will be notified of the new insurance policy with a different named insured. You then may have to get commercial financing, which is not as favorable as residential.
Business insurance policies are much more expensive than residential second home insurance.
All in all, it costs money.
If it's truly a vacation home, what's your reason for moving it to an LLC?
Thanks for the great information. Here are some additional details.
@Richard Dale-Mesaros - Yes, all great points! Thanks for the revocable trust idea. The main reason would be for asset protection, and the 2nd reason would be in case we do start renting it out in the future.
@Ann Bellamy - thanks so much for the great information!!! There is no mortgage on the NH property, so the due on sales clause shouldn't be an issue for us. The reason we are thinking of moving it to an LLC is because we are in the process of purchasing another rental property that *will* have a mortgage on it, that the bank won't let us put into an LLC, so we want to move/shield this NH property into an LLC for asset protection purposes (to shield it from this 2nd rental property that we can't put in an LLC). In addition to this, we are strongly considering renting out the NH property in the future so our other thought is moving it into an LLC may make sense from that perspective. I recently contacted an asset protection company about this situation, and their suggestion was to own the NH property in an NH LLC, and then have a Wyoming or Nevada LLC be the managing member of the NH LLC....with myself/wife as the managing members of the Wyoming LLC. Is this overkill? It sounded a little overkill to me, not to mention the various setup fees, and then the ongoing yearly fees to maintain it.
I wanted to reach out to the BP community to get thoughts on moving the NH property into an LLC for asset protection and potential future rental perspective, as well as any thoughts on the Wyoming-NH LLC structure that was proposed to me.
I think you are over estimating the value of the LLC.
This fits right in with the old saying. LLC's were developed by lawyers for the sole purpose of being able to sell them to their clients so they can charge setup fees.
I do have to admit it would be a little harder to get thru your LLC's, the person would at least need the help from a first year law student to break any protection you have.
Actually @Account Closed, you are incorrect on LLCs. The first one was formed in Wyoming between two oil companies doing a joint venture/partnership. When they filed their papers the IRS gave them pass through tax status and the use of LLCs spread like wildfire as they were much more flexible than corporations. The use of corporations has been tried and proven for hundreds of years. The old trading companies and merchant ventures were set up using limited liability investing.
I have seen several lawsuits try to pierce the corporate veil of corporations and LLCs. All were able to resist it if they kept up the corporate formalities. They do not protect from everything and you should be smart about them. Lawyers tend to make better operating agreements than most folks, but the main thing is operating them correctly. Not all folks do. LLCs and corporations tend to provide less protection to owner operators. They are more vulnerable to personal lawsuits outside of the LLC protection.
So not sure why you mentioned Due on Sale if you have no mortgage, since nothing would be due.
Your Wyoming/NH setup sounds like WAY overkill to me. You will need a NH LLC (f you do the transfer) because the property is in NH, but I see no point in the other. There may be one, I just don't see it. You also have to balance the risk vs the cost to protect. At some point that becomes ridiculous. Unless your NH house is very high end and you have significant other assets, it may be overkill at all.
Add up the cost of the NH LLC ($100 per year) and the cost of the increased commercial insurance, plus the inconvenience of separate bank accounts and accounting for the LLC, and compare it to a good umbrella policy.
Thanks @Jerry W. and @Ann Bellamy! All great information and very helpful. My "gut" agrees with both of you that the Wyoming LLC sounds like too much....and a NH LLC does feel like it has a place in my world.
Thanks everyone for your opinions and perspectives.