Tax question (sell from an LLC or quit claim sell as an indiv)

14 Replies

Hi my business partner and I have a 2 family in OH. Having a devil of a time getting a cash out refi because the post rehab value is only about $75k. Decided to go another route ... My thoughts are to withdraw from the LLC and buy the property as an individual from my partner. My questions is should my partner sell it to me from the LLC or quit claim the deed to himself as a individual then sell it to me. Trying to determine tax obligations / benefits / drawbacks to both scenarios. Also open to other suggestions. Thanks!

@MIke Williams   I assume you're keeping this as a long-term rental real estate property and you're not flipping it.

You're most likely creating taxable events by buying the property either (1) from your partner after he distributes it to himself via quitclaim or (2) from the LLC (IRC Sec 707)...

You should seek counsel from a tax CPA/EA and perhaps talk to more lenders.  Depends on your plans for the asset.

Originally posted by @MIke Williams :
Hi my business partner and I have a 2 family in OH.

Having a devil of a time getting a cash out refi because the post rehab value is only about $75k.

Decided to go another route ... My thoughts are to withdraw from the LLC and buy the property as an individual from my partner.

My questions is should my partner sell it to me from the LLC or quit claim the deed to himself as a individual then sell it to me.

Trying to determine tax obligations / benefits / drawbacks to both scenarios. Also open to other suggestions.

Thanks!

You need to talk to a CPA / tax attorney before implementing anything. I'm not understanding the point of not just buying the partner "out" of the LLC. Are you thinking you'll be able to refinance easier if you own it individually? Why not just reshop the loan to other banks under the LLC? After 6-12 months of seasoning, you should be able to add in rents into the refi calculation.

Originally posted by @Eamonn McElroy :

@MIke Williams  I assume you're keeping this as a long-term rental real estate property and you're not flipping it.

You're most likely creating taxable events by buying the property either (1) from your partner after he distributes it to himself via quitclaim or (2) from the LLC (IRC Sec 707)...

You should seek counsel from a tax CPA/EA and perhaps talk to more lenders.  Depends on your plans for the asset.

You are correct ,the idea is to keep it long term. We are having a very tough time finding a lender to refi each with their own reason... "we only lend to local borrowers" ..."we don't lend on investment property"... "we don't lend to LLC's" ... "even if the property is not in the LLC you need 6 mos rental history" ... "We don't loan less than $100K", as well as combinations. The reason we're exploring this not-so-creative creative option is because we used hard money to do the rehab and the loan will be maturing in the next 4 mos. We don't want to get caught unprepared. Our initial thoughts were if one of us can buy it from the LLC, we could use the balance of the cash from the sale to as either a down payment on a new property and hopefully use the cost of the down payment to offset the profit of selling the property and avoid any type of tax that would be incurred, or designate the cash a loan repayment for expense we paid cash for.

Sounds like you are right though, a cpa  consult may be the first order.

thanks!

Originally posted by @James Miller :
Originally posted by @MIke Williams:
Hi my business partner and I have a 2 family in OH.

Having a devil of a time getting a cash out refi because the post rehab value is only about $75k.

Decided to go another route ... My thoughts are to withdraw from the LLC and buy the property as an individual from my partner.

My questions is should my partner sell it to me from the LLC or quit claim the deed to himself as a individual then sell it to me.

Trying to determine tax obligations / benefits / drawbacks to both scenarios. Also open to other suggestions.

Thanks!

You need to talk to a CPA / tax attorney before implementing anything. I'm not understanding the point of not just buying the partner "out" of the LLC. Are you thinking you'll be able to refinance easier if you own it individually? Why not just reshop the loan to other banks under the LLC? After 6-12 months of seasoning, you should be able to add in rents into the refi calculation.

 Thanks James.

Thanks!

I think that's what i'll do. 

I'm not so much trying to buy my partner out- it fact we have no desire to split the business. We are just trying to find a way to get some capital out of the property before the hard money loan matures. One thing I forgot to mention is the rehab will be complete in a week or two, but the requirements, in terms of "seasoning" for most lender seems to be 6mos at a minimum - the loan matures in 4, so we are up against a clock that doesn't favor our hand. I've reached out to several lender(better than 20) and received all types of push back -"we only lend to local borrowers" ..."we don't lend on investment property"... "we don't lend to LLC's" ... "even if the property is not in the LLC you need 6 mos rental history" ... "We don't loan less than $100K", etc.

It seems like consulting with a CPA is the next step.  So I'll do a little due diligence on that front while shopping around a bit more.

thanks!

You have called community banks and credit unions in the area local to the property? If you haven’t, do so, and ask to talk with the commercial lending department.

Private money. Lots of retired folks earning zip in savings vehicles that would love a fixed 10yr hold at 7% or so. Maybe up to 70% of value.

My lenders developed over time and approached me with the idea so I don't have any magic ways of sourcing them, just another arrow in your creative quiver.  Good luck with your deal!

Originally posted by @MIke Williams :
Originally posted by @Eamonn McElroy:

@MIke Williams  I assume you're keeping this as a long-term rental real estate property and you're not flipping it.

You're most likely creating taxable events by buying the property either (1) from your partner after he distributes it to himself via quitclaim or (2) from the LLC (IRC Sec 707)...

You should seek counsel from a tax CPA/EA and perhaps talk to more lenders.  Depends on your plans for the asset.

You are correct ,the idea is to keep it long term. We are having a very tough time finding a lender to refi each with their own reason... "we only lend to local borrowers" ..."we don't lend on investment property"... "we don't lend to LLC's" ... "even if the property is not in the LLC you need 6 mos rental history" ... "We don't loan less than $100K", as well as combinations. The reason we're exploring this not-so-creative creative option is because we used hard money to do the rehab and the loan will be maturing in the next 4 mos. We don't want to get caught unprepared. Our initial thoughts were if one of us can buy it from the LLC, we could use the balance of the cash from the sale to as either a down payment on a new property and hopefully use the cost of the down payment to offset the profit of selling the property and avoid any type of tax that would be incurred, or designate the cash a loan repayment for expense we paid cash for.

Sounds like you are right though, a cpa  consult may be the first order.

thanks!

Let me get this straight, one of you personally has enough cash outright to pay off the hard money loan in your personal name, just not in the LLC name? If yes, why not just have that member contribute that cash to the LLC, pay off the loan, and you members change the allocations / distributions to allow the higher contributing partner a method to get back his excess contribution at a faster rate than you.

Or, is it neither of you have the cash, but you think a bank will lend to one of you to purchase it outright in your individual name?

Originally posted by @James Miller :
Originally posted by @MIke Williams:
Originally posted by @Eamonn McElroy:

@MIke Williams  I assume you're keeping this as a long-term rental real estate property and you're not flipping it.

You're most likely creating taxable events by buying the property either (1) from your partner after he distributes it to himself via quitclaim or (2) from the LLC (IRC Sec 707)...

You should seek counsel from a tax CPA/EA and perhaps talk to more lenders.  Depends on your plans for the asset.

You are correct ,the idea is to keep it long term. We are having a very tough time finding a lender to refi each with their own reason... "we only lend to local borrowers" ..."we don't lend on investment property"... "we don't lend to LLC's" ... "even if the property is not in the LLC you need 6 mos rental history" ... "We don't loan less than $100K", as well as combinations. The reason we're exploring this not-so-creative creative option is because we used hard money to do the rehab and the loan will be maturing in the next 4 mos. We don't want to get caught unprepared. Our initial thoughts were if one of us can buy it from the LLC, we could use the balance of the cash from the sale to as either a down payment on a new property and hopefully use the cost of the down payment to offset the profit of selling the property and avoid any type of tax that would be incurred, or designate the cash a loan repayment for expense we paid cash for.

Sounds like you are right though, a cpa  consult may be the first order.

thanks!

Let me get this straight, one of you personally has enough cash outright to pay off the hard money loan in your personal name, just not in the LLC name? If yes, why not just have that member contribute that cash to the LLC, pay off the loan, and you members change the allocations / distributions to allow the higher contributing partner a method to get back his excess contribution at a faster rate than you.

Or, is it neither of you have the cash, but you think a bank will lend to one of you to purchase it outright in your individual name?

 Hi James,

The latter is correct.  Neither has enough cash  (or combined), but I already have a bank lined up that will allow me to purchase it outright as an individual( 2 others have also agreed to finance the purchase).  I'm trying to decide whether or not to pull the trigger as I'd prefer not to go this route if possible.

Originally posted by @Steve Vaughan :

Private money. Lots of retired folks earning zip in savings vehicles that would love a fixed 10yr hold at 7% or so. Maybe up to 70% of value.

My lenders developed over time and approached me with the idea so I don't have any magic ways of sourcing them, just another arrow in your creative quiver.  Good luck with your deal!

 HI Steve,

Thanks - very interesting!  I'm going to investigate this option.  Much appreciated!

Originally posted by @Wayne Brooks :

Reinvesting Cash/profits from the sale of a flip is not an expense, and has no effect on the taxes owed on the profit from the flip.

 Ahh. Got it.  thanks for pointing that out. Exposes a flaw in the idea.

thanks Wayne!

Originally posted by @Kerry Baird :

You have called community banks and credit unions in the area local to the property? If you haven’t, do so, and ask to talk with the commercial lending department.

 Hi Kerry!

Thanks - I actually started with 5 or 6 local banks as you suggested. I may not have been in direct contact with the commercial lending  dept, however.   Maybe I'll circle back and revisit...

thanks for the idea!