Hey Omaree. This is not the type of work that I do so I can't really steer you in the right direction, other than to tell you to seek the advice of a tax attorney, real estate attorney and CPA. I do know enough to know that, if your LLC is owned by a self-directed IRA, this could be a prohibited transaction under the rules that govern SDIRAs.
If you are already in process of transferring, I am guessing this property is not financed, If it is, hopefully you are aware of due-on-sale clause. Some people want to play safe and not transfer into LLC if you have a personal debt.
People transfer an asset into LLC for asset protection. So you have to follow some steps to make sure you are getting desired protection and keeping the LLC separate.
The entity needs to maintain its own books. To get the desired asset protection, you need to treat LLC as a separate entity. Don't pierce the corporate Veil:
- This can occur if the entity either is poorly capitalized.Inadequate Initial funding of the entity
- or fails to maintain a separate identity from its owners ( using the business bank account for business purchases, maintaining separate books)
- Conversion of entities Assets for Personal Benefit:
- Another factor that poses a risk of piercing the corporate veil is the draining of entities assets (such as payments of large salaries to shareholder-employees) that leaves the entity with inadequate resources to pay its debts.
- Do not commingle personal and LLC assets.
- Maintain a separate LLC bank account.
- Execute an operating agreement.
- Follow the provisions of an operating agreement.
- Have LLC member meetings according to the operating agreement.
- Title property in the name of the LLC.
- Maintain insurance on LLC property in the LLC's name.
- Sign all LLC documents in the LLC's name, not the members' names.
Although Single member LLC are more prone to failing the separation test, these steps will also provide a better defense against other creditors attempting to prove to pierce the LLC veil.
SMLLC does not file its own tax return, meaning it is disregarded for the tax purpose, so you will still report the rental activity at Schedule C of 1040.
Interest and real estate taxes are treated as rental expenses and are listed on Schedule E rather than schedule A.
It does not matter you transferred the property at the mid-year. All the activity for the entire year is eventually going to end up on Schedule E anyway. You financials is not going to change because of the change of ownership.
@Ashish Acharya Thanks. That was great information. That gives me a basis of how to approach many things from this point. I appreciate it.
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