LLC Transfers Mortgages and Multi State Planning

9 Replies

Fellow BP Members,

This post is looking for inputs (or links to other threads I may be missing) regarding three inter-related issues (I do have an Attorney, Mortgage Broker, and Accountant...but sometimes I gain more clarity by reading a good BP post from accomplished investor).

Example Scenario: I own two rentals in two different states (Rental A, 2-family and Rental B, 1-family) both as personal investment properties. Rental A has an 8% hard equity loan against it (less than 50% of value), which was used to purchase Rental B (free and clear), which is now fully rehabbed and ready to rent. These two will both be partially managed by, and subsequently left to, one of my sons someday. My idea was to create a Manager-managed LLC for each, with Operating Agreement showing me as 99% owner and son as 1% owner and then take a note (either HELO or 1st Mtg) on Rental B and pay off Rental A [because my Mtg Broker in Rental B state is great].

I want my son to take 100% ownership of both properties if I die, but essentially be powerless for now (until his contributions of time/effort or money start kicking in).  So given that...questions...

1. What problems (or paperwork) should I expect from current lender for Rental A when I transfer Rental A into LLC (i.e. due on sale clause)? My 1% member has great credit, but low income relative to the asset.

2. By placing Rental B into LLC BEFORE taking a mortgage out (or equity line out), am I likely making it harder, easier, or same to get this property financed (traditional commercial against residential property) ?? [keeping in mind rental income won't start until next month on Rental B]

3. Does anyone see advantage to maybe just doing a Single LLC in one state (with one of the rentals being listed as a Foreign-entity)? Both my accountant and attorney recommend separate LLCs for each, especially if I decide to use the single-family as a short-term rental.

4. (opinion bonus) Is it worth the extra $2,000-2500 to hire two attorneys in two states to set up these LLCs/OAs versus utilizing some services I see where it can be set up for about $200 each if you add in EIN/OA work and maybe $125/year for registered agent in that state? [don't mean to sound cheap on the new LLCs, but rehab costs/time have been about 30% more than anticipated!]

Thanks in advance for any ideas/opinions!

@Jim Froehlich , I love it that you are being proactive and asking before taking action.  

You dont have to start with 1% and 99% LLC now because

1) you will have to file a partnership return for your LLC. Your kid might have to file a return if he is not right now

2) Your rental loss might be lost as your son will have no basis or at risk amount in the partnership to deduct the rental loss. It's just a bad entity structuring. 

3) On top of that,  you cant hire your son to work for your rental to save some tax as soon as you have MMLLC (out of scope for this post) 

Also, it does not accomplish anything as to transfer of the property to your son. Based on your age( your picture :)), right now, you can just get an SMLLC and transfer rentals into them if you are concerned about the liability. LLC with give you no tax benefit but a legal protection. I would also say, you might not even need LLC if you have a good insurance. But if you want it, get SMLLC.

Regarding your concern of transferring property to your son, after you die, your property will go to your son anyway via you will. but if you want to not go through the probate you can get a trust. Trust will also protect your asset. And your trust can own the SMLLC that you created now. 

Bottom Line: after a few years, you can create a Grantor trust with your son as a beneficiary. You would still be reporting the income and managing the property with the grantor trust. Your trust can own your LLC if you create one now.

I'm not a lawyer nor a CPA and this comment is not a legal nor tax advice... You've been warned.

Now, after reading multiple books on the subject, consulting with multiple attorneys, I would look into the following setup that would give you the most flexibility:

Create a living trust for yourself. That will avoid probate in case of your death.

Create a single member, manager managed, LLC for each property in the state where the property is located. A registered agent will cost you around $50 per year with cheap online registered agent service (you don't need anything fancy for that as the service of registered agent is pretty basic). These LLCs will need a pretty standard asset protection/real estate oriented operating agreement. As these entities will be disregarded for tax purposes, there will be no tax filing on them.

If you want to refinance one of the property, I would suggest to do it before transferring into the LLC as you will get better offer with a personal mortgage than with a commercial one. Then after you refinanced it, transfer it to your LLC. If you are worried about the due on sale clause, create a Land Trust for the property where you are the initial beneficiary, then make a quiet assignment of beneficial interest to the LLC later on.

Create a multi-member, manager managed, holding LLC in a state like WY (great charging order protection) that will be the single member of your two LLCs.

The majority member of your holding LLC will be your living trust (ie you). Your son would be the initial minority holder.

Have your lawyer set up a strong operating agreement that will not only provide asset protection but also keep your son as a non decision maker even if his shares interest increase in the holding LLC, making you the one in control.

Every year, gift tax free to your son more interest in the holding LLC (up to the gift tax exemption fair market value).

This holding LLC will file a 1065 and issue a K1 to all members. No tax will be due by the holding LLC, but by each member individually.

Last, create a property management C corp that you will hold all shares in your living trust. This C corp will be the manager of all your LLCs. Through this corp you would be able to get fringe benefits like medical reimbursement plan, you could deduct your business related expense, you can take a salary and contribute to a pension plan, you could hire your son or other family member with lower tax bracket to offer them also other benefits.

Originally posted by @Ashish Acharya

Trust will also protect your asset.

I don't believe that a grantor trust will provide any asset protection. To my knowledge only an irrevocable trust would do so.

Originally posted by @Mike S. :
Originally posted by @Ashish Acharya: 

Trust will also protect your asset.

I don't believe that a grantor trust will provide any asset protection. To my knowledge only an irrevocable trust would do so.

 Mike, Grantor Trust can an irrevocable trust.