How do I assign my rental under my newly created LLC?
CA · Member since 2011 · 4 posts · 0 votes
Sorry for firing off another post so soon, but I'm getting great advice and extremely happy I just found this forum.
I created my LLC. Now what is needed to get my rental property to fall under this LLC and not just my name?
I don't have to refinance it do I?
On a side note, for an LLC, how do I incur certain charges to fall under this LLC? Also, is there a list of what I can and cannot put under as a tax write off/expense as being a landlord now under an LLC? For what it matters, I'm also working on renewing my real estate license as it has expire, I'm not sure if that will give me any benefit.
Thanks.
Ahh, another "Show Me" guy! Hello Shane!
Good lawyering Shane. Comingling funds is an opening that you can close somewhat by selling the property from yourself to the new LLC. I had a few properties that I ended up taking personally and sold tehm to my LLC at the payoff. I used a "subject to" contract from myself and my wife to the LLC. I used a Special Warranty Deed as you shoulddo with any Sub-2 transaction. Since my LLC did not obtain title insurance, assigning with a SW Deed provides good title to the LLC (subject to the existing lien) and keeps my personal coverage enforce so to speak in the event of any title problem.
If I were to quit claim the property, I only convey that interest which I MAY have in and to the property. If a title issue arises my LLC has no coverage. For any insurance policy of any kind, the insured must have an insurable interest in the property, they must suffer a financial loss to receive any benefit. A quit claim deed makes no guarantees as to conveying good title, but Ino longer have any insurable interest in the property, unless I'm sued. My LLC would need to make a claim against me and suing yourself as the principal memeber of the LLC and you personally, is rather hard to do. The title company won't buy it, IMO. Ask your attorney.
If I provide a guarantee of good title, subject only to the existing lien, I have an insurable interest in the property with the liability of the existing lien and I could act personally to protect the remaining interest under my title policy without having to sue myself.
However, if a third party were to ever sue you due to your past ownership of a property and you had title insurance, the insurance would defend you. So, it depends on what the claim is and who the third party seeks indemnification from.
I have never had a title issue that required a claim, knock on wood, but someone I know did, with a newly constructed home and the owner conveyed the property to an LLC. His title insurance whcih he closed on personally refused to act in the matter. It was taken care of in about a year of bickering with a contractor.
So these issues can be a fine line, using a Special Warranty Deed just makes that line a little thicker, in Missouri.
Another aspect is transferring the property at what appears to be an arm's length transaction.
IMO, a sale appears to meet the requirements better than a transfer of assets from me personally to my LLC. The appearance of acting independently as an individual and as a business entity is strengthened, with major assets. IMO, it is entirely different assigning personal property, such as a used computer, but that too should be purchased by your LLC.
See your tax advisor as to why.
As to the "due on sale" and you lender. I give notice to the lender as to what I'm doing. I understand why many don't, but those who don't might slide by easily. It may depend on how well equiped you are to state your case and overcome objections of the lender. I never had a loan called due and over a thousand deals trickled through my fingers. I did have some rather strong objections, usually from BoA, but the bark was worse than the bite!
Basically, I wrote a letter something like this:
I am arranging my personal affairs at the advice of my attorney and my assets are to be sold or transferred to my limited liability company. The company is held by my wife and I soley and no other members shall be admitted as the company is part of my estate planning.
The subject property secured by your deed of trust made on the ___ day of ______, ____ by myself and my wife shall remain in full force and effect and she and I remain fully responsible for the obligation as made.
The transfer for estate purposes shall be made on or about the ____ day of ________, ____ as currently scheduled.
In the event ____ (Name of Note Holder) has any objection to this personal transfer, please contact me at the address given below within 10 days of receipt of this notice and if no objection is made, consent shall then be considered to have been properly given.
Send it off registered mail, return receipt requested. Then wait, then I would proceed.
Another aspect of fighting with any lender claiming a breach of the covenants is that they always must give a notice to cure any default, if push comes to really hard shoves, simply deed the property back. Then there is no harm, no foul. But I never had to do that either.
I have used a quit claim deed as well, it depends on the property, IMO. My rule is that if a property is new, say less than five or seven years old, the risk of having any title claim is a little higher, especially due to property lines and more so in rural areas or where easements exist. If a property is in a palted subdivision and is an older property, your risk of claims as to property lines is minimal, IMO.
You should have gotten title coverage personally so you can look at Schedule BII and determine what is and what is not covered and assess the risks accordingly.
Better yet, ask the title company to issue a new policy to the LLC and they will only need to runtitle from the date your policy was issued to the date it is transferred and any search fee should be minimal, if any at all. You may also consider transferring your premiums to the new policy and terminate your coverage. You can not terminate the lender's coverage. Wheather or not a title company will do this will be up to them, if you have a good relationship with them (as I do) they will work something out with you.
Before you transer any property I suggest you discuss the issues with, your attorney, your title company, your lender (as required) and your tax advisor.
There are several posts detailing this process here on BP. Basically, you need to deed the property over to your LLC. We used a Grant Deed under the advice of our attorney, but most people here say to use a Quit Claim Deed. Nobody has yet explained to me why.
Basically, your deed will read something like:
Adam Collopy, as his sole and separate property, hereby grants or quit claims the property described below to: My Company, a California Limited Liability Company (or whatever state) Ask for help from an attorney, escrow officer, title specialist, etc. if you're not sure how to write up a deed.
No, you do not, nor could you (it would be near impossible), refinance the property under your LLC.
First off, I hope you set up a business bank account for your LLC. After that, it's easy. Your LLC collects the rents (your tenants make out their rent checks, money-orders, etc. to your LLC, not you) and your LLC pays the bills, with its checks, debit cards, bill pay, etc.
As to your second question, no, pretty much whatever deductions you took personally will still be taken by your LLC. Of course, you will now be adding the expenses of maintaining your LLC to your list of deductions.
exactly as Mitch described. This is what I have done with my single currently financed property.
One word of caution ... The bank can "Call" on the loan, meaning, if they find out you have quit claimed it, they COULD call for the amount owed on the loan then & there. If you don't come up with the funds, they foreclose on the property. Now, the chances of that happening are EXTREMELY low, assuming you keep up with payments, but it can happen.
Its a risk, but a risk I think is worth it in the end. Just an FYI :)
Good luck!
I agree with the above. We quit claimed several properties to the LLC, it took 3 times of going back to the register of deeds because everything must be exact with the paperwork. So, if you do it yourself be prepared for some frustration. If I had to do it over again I would probably have a real estate attorney do it.
Not to hijack this thread, but I was logging on BP to ask a similar question.
I'm getting ready to move out of my townhouse and I want to quitclaim it to my LLC. I figured I'd just call a title company to write it up. Is that best?
I was also going to ask if I needed to refi the property for the business. I see you guys are saying no, which leads me to this question: Do you expose the LLC to becoming a victim to the "pierced corporate veil" problem by mixing personal financing?
Ahh, another "Show Me" guy! Hello Shane!
Good lawyering Shane. Comingling funds is an opening that you can close somewhat by selling the property from yourself to the new LLC. I had a few properties that I ended up taking personally and sold tehm to my LLC at the payoff. I used a "subject to" contract from myself and my wife to the LLC. I used a Special Warranty Deed as you shoulddo with any Sub-2 transaction. Since my LLC did not obtain title insurance, assigning with a SW Deed provides good title to the LLC (subject to the existing lien) and keeps my personal coverage enforce so to speak in the event of any title problem.
If I were to quit claim the property, I only convey that interest which I MAY have in and to the property. If a title issue arises my LLC has no coverage. For any insurance policy of any kind, the insured must have an insurable interest in the property, they must suffer a financial loss to receive any benefit. A quit claim deed makes no guarantees as to conveying good title, but Ino longer have any insurable interest in the property, unless I'm sued. My LLC would need to make a claim against me and suing yourself as the principal memeber of the LLC and you personally, is rather hard to do. The title company won't buy it, IMO. Ask your attorney.
If I provide a guarantee of good title, subject only to the existing lien, I have an insurable interest in the property with the liability of the existing lien and I could act personally to protect the remaining interest under my title policy without having to sue myself.
However, if a third party were to ever sue you due to your past ownership of a property and you had title insurance, the insurance would defend you. So, it depends on what the claim is and who the third party seeks indemnification from.
I have never had a title issue that required a claim, knock on wood, but someone I know did, with a newly constructed home and the owner conveyed the property to an LLC. His title insurance whcih he closed on personally refused to act in the matter. It was taken care of in about a year of bickering with a contractor.
So these issues can be a fine line, using a Special Warranty Deed just makes that line a little thicker, in Missouri.
Another aspect is transferring the property at what appears to be an arm's length transaction.
IMO, a sale appears to meet the requirements better than a transfer of assets from me personally to my LLC. The appearance of acting independently as an individual and as a business entity is strengthened, with major assets. IMO, it is entirely different assigning personal property, such as a used computer, but that too should be purchased by your LLC.
See your tax advisor as to why.
As to the "due on sale" and you lender. I give notice to the lender as to what I'm doing. I understand why many don't, but those who don't might slide by easily. It may depend on how well equiped you are to state your case and overcome objections of the lender. I never had a loan called due and over a thousand deals trickled through my fingers. I did have some rather strong objections, usually from BoA, but the bark was worse than the bite!
Basically, I wrote a letter something like this:
I am arranging my personal affairs at the advice of my attorney and my assets are to be sold or transferred to my limited liability company. The company is held by my wife and I soley and no other members shall be admitted as the company is part of my estate planning.
The subject property secured by your deed of trust made on the ___ day of ______, ____ by myself and my wife shall remain in full force and effect and she and I remain fully responsible for the obligation as made.
The transfer for estate purposes shall be made on or about the ____ day of ________, ____ as currently scheduled.
In the event ____ (Name of Note Holder) has any objection to this personal transfer, please contact me at the address given below within 10 days of receipt of this notice and if no objection is made, consent shall then be considered to have been properly given.
Send it off registered mail, return receipt requested. Then wait, then I would proceed.
Another aspect of fighting with any lender claiming a breach of the covenants is that they always must give a notice to cure any default, if push comes to really hard shoves, simply deed the property back. Then there is no harm, no foul. But I never had to do that either.
I have used a quit claim deed as well, it depends on the property, IMO. My rule is that if a property is new, say less than five or seven years old, the risk of having any title claim is a little higher, especially due to property lines and more so in rural areas or where easements exist. If a property is in a palted subdivision and is an older property, your risk of claims as to property lines is minimal, IMO.
You should have gotten title coverage personally so you can look at Schedule BII and determine what is and what is not covered and assess the risks accordingly.
Better yet, ask the title company to issue a new policy to the LLC and they will only need to runtitle from the date your policy was issued to the date it is transferred and any search fee should be minimal, if any at all. You may also consider transferring your premiums to the new policy and terminate your coverage. You can not terminate the lender's coverage. Wheather or not a title company will do this will be up to them, if you have a good relationship with them (as I do) they will work something out with you.
Before you transer any property I suggest you discuss the issues with, your attorney, your title company, your lender (as required) and your tax advisor.
Wow, impressed with the level of answers. But to sum up.
General Warranty Deed, NOT Quick Claim Deed because you would break the title insurance which you already paid for. (more detailed explained in Financexaminer) (I own a title company, he is right)
YES, the bank can call the note as a violation of "due on sale" clause. it happens more than you think. Simple email to your LO, who has no idea what you are doing, will get confirmation you are OK. and it will help.
The question not answered, limits on what can go into your llc for write off, that's more of a CPA question, but from experience, here goes: no real limit. if it has to do with the house, you can write it off. This includes the mileage of driving to home depot for that spare key. (only if you went from the house and back to the house, if you went from home, it sometime does not count)
Just wish to make a quick few points here on this thread:
First off Mitch is correct you can absolutely grant claim deed/title to your LLC.
I would do that for a short hold maybe until you sell for example that would be fine and no legal advice intended. Even with the corporate veil in the LLC why increase your liability by deeding title to the LLC. ?? since IMHO LLC's were not meant to hold asset real estate that what Land Trusts were made for.
Please note I encourage the use of LLC's they are vitally important in your business.
As to the DOS yes this most likely would not happen but with a LT you would not even have to worry about it anyways. ( Reference: Garn St Germain Act of 1982 Section 8a).
What would be more prudent is to use a land trust and assign a % of beneficial interest to your LLC or C-corp etc and so now you have a layering of assets and a dual shield of asset protection and creating a basic asset protection strategy.
If a creditor did go after you they would have to pierce the LT then break a corporate veil which if any lawyer encountered would be a much bigger challenge to undertake. (Reference Kenoe on Land Trusts 1989) just so you know this ruling stops the partitioning of beneficial interest in a LT so a creditor could not pierce the trust with a charging order since other beneficiaries would be negatively impacted.
The worse case scenario would be the creditor can take that say 10% beneficial interest in the trust and they would not get paid until the property sold to cash out but the trust itself it NOT pierced and nothing is ironclad.
The LLC protect the LLC members form liability and the LT protect the "corpus" or real property.
Depending on your exit strategy determines the trust you should use and how it would be setup.
I use LT in my investing and honestly like the way they work when done right so just wish to chime in.
LT also work very well in multiple investor scenarios on property.
LLC and Land Trusts are like bread and butter they work very well together that is basically my point.
Mitch as to grant claim deed my understanding is you show proven reliable chain of title and that you have documentation you have the right of ownership. In a quit claim there is more liability due to not certain this person has the right of ownership to be able to deed a property to you so I would research that one.
Quit claims from what I have seen are mostly done in living trusts to heirs or when they wish to quit claim to family members in thus following federal law- Garn St Germain Act..I realize investors use quit claims to deed to other parties but as to it being a arms length transaction..??
If I can help please feel free to email me...
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Need I say more?
Adam,
I hope your CPA told you that there is no tax benefit to be derived from having your rental property owned by your LLC. I believe in another post you described your LLC as a single member LLC, which is treated by the IRS as a sole proprietorship.
Your LLC is tax neutral. That is, you get the same rental property expense deductions and have the same tax liability on your rental income whether the property is held by the LLC or held in your own name.
If you are managing your rental property yourself, make sure you have a discussion with your attorney to make sure you understand that there is no liability protection offered by your single member LLC should you be sued by your tenant.
Make sure you have adequate liability insurance under your rental dwelling insurance policy in place before you let a tenant move in.
If the LLC is elected to be taxed as an entity that would provide tax benefit in Adam's specific situation, then there IS a tax benefit to holding in the LLC...
J Scott,
Not really. Legitimate rental expenses can always be deducted with or without a business entity.
For tax purposes, a single member LLC can be treated as a sole proprietorship or as a corporation.
If the rental property is held by a sole proprietor LLC, Adam gets the same rental expense deductions on his tax return and the tax liability on his rental income is passed through to his personal tax return, unaffected by the presence or absence of an LLC. In practice, Adam would report his LLC rental income and expenses on his personal 1040 Schedule E as if the LLC did not exist.
Adam could elect to have his LLC treated as a corporation for tax purposes, but that just brings double taxation issues into play for any "dividends" or capital gains distributed by the LLC, and, denies Adam use of the net passive loss allowance should his rental activity have a tax loss. Should Adam decide to dissolve his corporation LLC and retitle the property back to his own name, then the transfer is treated as a taxable event subject to capital gains taxes.
As a general rule, there is no tax advantage to putting a rental property into an LLC. Confirm this with your own CPA and/or tax advisor.
Boy, it's never simple is it? I suppose it can't be. If it were, everyone would be doing it.
As always, great advice!
Apologies for resurecting an old thread, however this one has lots of useful info and comes closest to the question I am asking.
I have a farm with option to split off an existing building (one of two) and rent that out, so I then have two properties, live in one, rent out the other. They are contigious, at this moment one property. Basic thus far, now come the details:
I plan to deed that rental property to my LLC and then rent the farmable land on the rental property from the LLC. Is that rental payment counted the same as the house (renter) rental payment? Is that rental fee paid my me for grazing rights counted as an expense, or is the IRS going to cry about this?
The reason I question about this is that if I own the land I cannot deduct the cost of it as an expense, but if I pay rental fees then I can deduct those fees...
Advantages? Disadvantages? Suggestions?
Thanks,
Tony
Not sure I understand. Are you going to the tenant on the land that will belong to the LLC? And you're wondering if you can deduct the rent paid to the LLC as an expense? If so, it won't have any effect on your taxes. You will pay rent to the LLC. That's a deduction for you. But its income for the LLC. The LLC's income flows back to you. So, on your tax return it nets out to $0.
LLC as disregarded entities for taxes, unless you elect to be taxed differently. So, you can really just flat out ignore them for taxes.
If you rent out your property, the rent receive is income.
If you rent a property for your business, the rent you pay is an expense.
thanks Jon,
Where the difference comes is if I own the land I farm, I cannot assign a cost (deduction) to the land I use, whereas if I rent it then I can deduct that expense.
I gather from your response that I can rent from my LLC, it is a wash costwise but from a taxation standpoint I can now deduct the rent from income and show a lower net profit.
Thanks,
Tony
Tony,
Jon's point is that the rent the LLC pays you is a deduction to your LLC and additional income to you personally. The amount you lower your LLC tax bill is likely to be the amount of the increase in your personal income tax liability. Therefore, no NET tax benefit.
People have thought of this before, the company applies expenses, maintenance, etc to reduce the income from the rents and write off the rents.
It's called a sham transaction to evade taxes.
This is similar to a sale-lease back, which is done all the time but not from from-to and between the same principles.
I will add my vote to what Dave and Bill are saying. You're attempting tax evasion. Ignore the LLC, it has ZERO effect. You're wanting to rent this land to yourself. Then, you claim the rent as a deduction. And you want to not report the income from the rent. You might as well just make up some rental number and put it down as a deduction because that's exactly what you're doing.
The difference is here:
If one owns the land, you cannot deduct it as a cost of business. If you rent the land, you can deduct the cost of the rental payments as a cost of business.
If you rent from someone else, you get a "tax benefit" but net less due to the cost of the rental, but typically your payments on land you own are higher than rental rates... and you cannot deduct them in an agricultural operation.
Just trying to get some kind of way to deduct those cost, they are a real and fixed cost.
To me it does not make sense that you can spend a million on land (which you very much need) and cannot deduct this very real cost, while if you rent the land you can deduct the rental payments.
If there is not a legal way around this the best thing is to rent, not own land...
Suggestions?
Tony
Oh, and if you own you need to pay taxes, while renting does not incure that expense.
No Tony...HERE is the difference.
If you own the land, then you own an asset. You get no tax benefit from using your own non-depreciable asset. (You DO get a deduction for the mortgage interest and property taxes if the land is used in your agricultural operation.) You also can use the cost of the land to reduce any future taxable gains should you sell the property.
If you rent the land then you are paying someone for the privilege of using their asset. This would be conisdered a 'cost of doing business' and a tax deductible expense.
Yes, you can transfer the property to your LLC. And, yes, you can then rent the property from your LLC and deduct the rent as an expense for your agricultural operation. BUT, as several have pointed out, the LLC will now have rental income. Depending on how you elect for your LLC to be taxed this amount may flow to your personal return. If the income from your agricultural operation also shows up on your personal return there is a ZERO net tax effect as the income from the LLC will offset the expense for your agricultural operation.
That being said, we are all speculating as to what affect this will have on your taxes. At this point we have no idea as to the entity structure and tax elections you have in place for either your LLC or your agricultural operation. You really should discuss this with your tax pro. He/she is in a better position to advise you.
Thanks Bill,
I guess where I kind of wonder is this:
If I buy a tractor or some other piece of machinery vital to my operations, I can offset income with that, as it is a cost of doing business. This is true whether I buy or lease, I can (rightfully so) show it as a cost.
I apologize if I am coming across as dense, I am not an expert on taxes or entity setups, so thanks for the assistance here.
I just wonder what is the difference between a piece of equipment (rented or bought) vs land. One could argue that both are assets, but the treatment of both is much different.
I wonder why land is treated different?
You see, if I am going to start farming, I need land. I must either buy it or rent it. If I rent it, I have a cost which I can use to offset income. If I buy it, I cannot depreciate it (land) and I can only deduct interest and taxes. Net net, buying is much more expensive. Is there any way around this (where the cost of buying land for business is factored in as a cost) or is it just best to rent the land in this type of situation?
Thanks,
Tony
I believe the deductions on your equipment stem from the depreciation and from the consumption of fuel, repair parts, etc - in other words, these are things that lose some of their value with their use.
The land is not deductible because it is classified as non-depreciable. In fact, when I buy a rental house, the value that we use in calculating the depreciation has to take the purchase price and subtract from that a land value - because there is no depreciation for the land.
This is the difference that I think you are looking for ...
Thanks Steve,
I understand depreciating real property, ie assets depreciate and thus are deductable.
I just wonder if there is a strategy out there to overcome this minus of land not being depreciable, deductable, thus costing more than renting.
I am at the point where it makes much more sense to rent land than to purchase more.
Example: Purchase 100 acres at 4500 per acre. Total cost: 450,000. If you finance the total it is 2698 per month (6% / 360). Taxes are about 3000/year, so total yearly cost is 35,376.
If you rent a similar size you may pay 150 per acre/year, and you do not need to pay taxes. So your total yearly cost is 15,000 per year. Plus this is an expense against income.
Do you see where I am coming from? I would like to purchase more land, but do not see the point when I can get 3 times the acreage if I rent the land and have some (small) tax advantage.
Any ideas here, or is the best just to rent the land as I am now at?
Looking at it from a long distance it seems that land is too expensive and rent is too cheap?
Thanks to all for their input,
Tony
Anthony Halstead
Tony...you simply are NOT going to be able to write off the cost of purchasing a non-depreciable asset. The cost will be recovered should you sell the asset in the future. If the amount of the tax deduction is more important to you than the ownership of the asset, then by all means - rent. That is a financial decision that you must make for yourself.
I admit I am not up on how expenses may be treated differently with regards to farm income. However...
If you have a business (whatever the structure or the entity), you can deduct expenses you incur to produce income, if the expense is reasonable and necessary, etc....
Therefore, if you buy a tractor that is used to produce income, you can deduct the expense (I know it is technically depreciation taken over a number of years, but amounts to the same thing.) If you don't use the tractor to produce income, you cannot deduct the expense.
If you purchase land to farm, what is the expense? Well, one might say the purchase price is the expense. In a sense, it is. For tax purposes, it is not. Land is not depreciable because it does not get used up and become worthless over time (like a tractor does). If some resource on the land does get used up, then you can take a deduction for depletion. For tax purposes, the only expense of the land is mortgage interest and property taxes - both of which are deductible. You recover your initial investment in the land (purchase price) when you sell it. If you realize a loss on the sale of the land it counts as a deduction for you. If you realize a gain, it is taxable.
Maybe I'm missing something, but what are you concerned about missing out on? If you lease property to use for farming, the lease price can be a deduction (I assume - too lazy to confirm right now) because you don't own the land to sell later on to recover the investment.
If you own the land and want more money now instead of later - sell it, otherwise...........