I have an existing Buy and Hold Rental business, but looking to expand into Private Lending and Performing Notes.
The question I have is, is it typically ok from a tax perspective to hold Rentals and Notes in the same entity? Just getting some feedback on any potential issues that would arise from doing such a thing, or is it typically best to keep them separate and have an entirely different entity for the notes/lending aspect of the business.
I keep property and notes separate. Not from a tax perspective but a asset protection standpoint. Rental property has liability risk. Notes for the most part do not have much risk or liability. If I am foreclosing on a note/mortgage I move it to another entity because it will change to rental property with risk.
Thanks, Nice way to look at it. I never looked at it from a liability perspective and bonus for the fore thought to move to the rental entity if you are foreclosing!
Nice strategy there. If I could give 2 votes I definitely would!
Would the opposite work as well?
For example if you are starting with a non performing note would it be a good idea to purchase with the rental entity because you need to start foreclosure process during work out. Then if you get it performing transfer to performing note entity?
Mentions not working from my phone.
@Jeff V. @Carl Fischer As an AP attorney I can tell you that Carl's strategy is sound. I would provide some slight tweaking in that I keep all my assets of the same tax type in a Series LLC to hold them compartmentalized one from another (I do this as a matter of process even though @Carl Fischer is right that performing notes have very low risk). I then would take anything that has liability associated with it (i.e. a non-performing note that is in foreclosure @Jeff V.) and compartmentalize that in a one-off LLC OR I could use an individual Series of my Series LLC.
From an attorney/investor perspective, I don't really care what you do as long as you compartmentalize your risks.
I actually had a conversation with my CPA about this awhile back. From a tax perspective, it doesn't really matter if you hold notes and rentals in the same entity. But as mentioned, you might not want this from an asset protection standpoint.
It would work and is good to have a non performing note in a separate entity especially if you are personally doing the workout I know people who get sued by and brought up on charges by state attorneys for “servicing” notes without a license.
Non-Performing note workouts in some cases have risk. @Dave Van Horn can provide more about this issue.
@Jeff V. "Then if you get it performing transfer to performing note entity?" You could do that, you would want to record a new assignment of mortgage with the county so they know that your new LLC now owns it. Extra expense, it would be better to record it in the final LLC, rather than have to transfer it.
@Jeff V. I agree with @Carl Fischer on it being a liability issue rather than a tax issue. When talking entities I think the self-directed IRA is one of the best ways to hold notes. You can also setup a Trust and have the SD IRA be the beneficiary. Of course this works for retirement income rather than income now.