Raleigh, NC · Member since 2017 · 347 posts · 94 votes
is it better to create an LLC and have the property in the LLCs name (how do you deal with due on transfer clause) or just keep it in your own name and came it on your own taxes?
TLDR: when starting off (one property), does forming a company offset the higher taxers for corporations, and annual fees?
There is some debate about the due on sale clause regarding LLCs. Some lawyers will tell you that transferring to an LLC violates the due on sale clause, which allows the lender to call the loan due. Although that is legally true, the reality is that I've never seen the lender call the loan due. They just continue to collect the payments even if the check says "Chris LLC" on the top. They want your interest money. So, I've never seen anything bad happen from transferring to an LLC. That being said, just understand both the legality and the reality of the due on sale clause.
I can't comment much on the tax stuff, other than I have heard that if you are your own single member LLC, it's taxed as your normal income. You can elect to be taxed as a corporation, but if you don't make this election, your single-member LLC is treated as a "disregarded entity" and you won't be required to file a separate tax return for your LLC. But there is a annual state tax to pay, California's is $800 a year. It's probably less than that in most states.
By the way, this is not legal advice, only for educational purposes, obviously! :)
There is some debate about the due on sale clause regarding LLCs. Some lawyers will tell you that transferring to an LLC violates the due on sale clause, which allows the lender to call the loan due. Although that is legally true, the reality is that I've never seen the lender call the loan due. They just continue to collect the payments even if the check says "Chris LLC" on the top. They want your interest money. So, I've never seen anything bad happen from transferring to an LLC. That being said, just understand both the legality and the reality of the due on sale clause.
I can't comment much on the tax stuff, other than I have heard that if you are your own single member LLC, it's taxed as your normal income. You can elect to be taxed as a corporation, but if you don't make this election, your single-member LLC is treated as a "disregarded entity" and you won't be required to file a separate tax return for your LLC. But there is a annual state tax to pay, California's is $800 a year. It's probably less than that in most states.
By the way, this is not legal advice, only for educational purposes, obviously! :)
@Max Gradowitz nailed it on taxes. With or without an LLC, your tax return will look exactly the same, and your taxes will be the same. You will need to make an extra step (corporate election) to change taxation for your LLC, and you need a good reason to do so. Usually, no good reason.
Then the question of creating an LLC is strictly legal protection - which I will leave for attorneys to muddle. :)
Lenders may require an LLC formed to help establish that this is clear business use and not something you claim as personal residence to use foreclosure protection.