Looking for real estate attorney advice or CPA advice

Tax, SDIRAs & Cost Segregation
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Looking for real estate attorney advice or CPA advice

Dj J.
Rental Property Investor · Dayton, OH · Member since 2019 · 3 posts · 2 votes

I list both CPA or Attorney because I am not sure which would be a better for this subject. Frankly talking to both is probably my best option.

Asking for a friend*

Say someone is about to close on their first investment property, and it's being financed in their name. Residential property. Right around closing they create a land trust and transfers title to the land trust, while also creating a new Ohio LLC and setting the LLC as the beneficiary ( having due diligence to set the trustor as an anonymous figure) . Would this person now be good to legally operate and claim rental income as income for this LLC from property in the trust, and can they also claim all of the expenses for operating (mainly curious on repairs) as expenses the LLC can also claim ?

This property being purchased is very old (130+ years) , and its understood that this thing will need a lot of repairs in its first year of new ownership to maintin this thing..The biggest question is after setting up the above scenario with a Land trust and LLC is

A: thinking it would be more tax advantageous to claim all of these repair expenses to the LLC rather then in their own name (correct me if I'm wrong on that)

B:want to learn the ropes of owning and operating an LLC, seperating all bank accounts, for future growth of not only aquiring more rental real estate but also possibly transitioning to full time running the LLC as well as starting others (a transition away from my 9-5 as a way to have a more flexible schedule for my children and family) .

Is this a possibility or is the entire idea of operating an LLC which is create off an asset owned in and trust not possible? Once again, would be Ohio LLC- owned only by the investor and their spouse

Thanks ahead of time if anyone is able to answer this long drawn out question! Hope everyone is having a great memorial day weekend

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David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
6y

@Dj J.

I don't know much to anything about how the land trust may complicate the tax situation.  I know its for anonymity and you hold the paperwork so nobody knows anything about it...  That being the case...

A -- it really shouldn't matter "where" you claim the taxes. Well, it technically/legally matters in terms of filing your return correctly. Numbers-wise, it should be the same thing. Either way, the income and expenses for a rental are added / subtracted the same regardless of your personal return or a LLC. You'll wind up with the same passive income / loss. If you have a single member LLC, the Federal IRS treats it as a "disregarded entity" --- basically, it doesn't see the LLC as another legal entity so the LLC's filing is with your own personal return. So, you file a SchC for any active type income /expsense and you file a SchE for the passive (i.e. your rental). So, either way, it ends up on your 1040. If you have more than one person owning hte LLC, then its automatically a partnership and each person gets a K-1 which shows the amount to report --- in the same way. So, the same number (and income type) still shows up on your 1040...

If you want to make it really complicated, your multi-member LLC, assuming you have a mult-member LLC, can elect to be taxed as a S Corp or C Corp. But, doing this is somewhere between more advanced tax planning or kinda silly (especially the C Corp).

B -- so whats the question? If there is a single guide or book on how to protect the corporate veil that would be great. Mainly, its all about not co-mingling funds / expenses is what I have found. As its been discussed many times in BP forums, LLC's really aren't necessary (and there are those who have an opposite viewpoint) for smaller operations due to the costs, overhead (you already know about the bank accounts), more expensive financing, etc...

One thing to add as I'm looking over your post again, I have no idea how financing a property in your personal name yet purchasing it in the name of a LLC will fly in terms of piercing the corporate veil. I'm more used to hearing of the LLC being the purchaser and mortgagor while the LLC member personally gurantees the loans. Having split ownerships like this is perplexing to me. Who makes the mortgage payments? The money should come out of your personal bank account. Well, where does that money come from? Are you saying you will transfer funds from the LLC bank account each month (or you need to make the appropriate journal entries) to cover the payments? As a partnership, I don't know if you can technically deduct the interest payments because you, personally paid it. If the LLC is to count it as an expense, how is it doing legally? Are you going to create some sort of contract between your LLC (which is a partnership since its two of you) and yourself? Remember, you need to operate the LLC as a standalone business. Would any other reasonably business owner be making payments on a mortgage that wasn't theirs without some sort of contract? Yup, makes your head spin, huh. Honestly, I sort of stay away from these complications.

As always, you should seek guidance and counsel from a qualified professional, or two.  Good luck.

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  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    6y

    @Dj J.

    I don't know much to anything about how the land trust may complicate the tax situation.  I know its for anonymity and you hold the paperwork so nobody knows anything about it...  That being the case...

    A -- it really shouldn't matter "where" you claim the taxes. Well, it technically/legally matters in terms of filing your return correctly. Numbers-wise, it should be the same thing. Either way, the income and expenses for a rental are added / subtracted the same regardless of your personal return or a LLC. You'll wind up with the same passive income / loss. If you have a single member LLC, the Federal IRS treats it as a "disregarded entity" --- basically, it doesn't see the LLC as another legal entity so the LLC's filing is with your own personal return. So, you file a SchC for any active type income /expsense and you file a SchE for the passive (i.e. your rental). So, either way, it ends up on your 1040. If you have more than one person owning hte LLC, then its automatically a partnership and each person gets a K-1 which shows the amount to report --- in the same way. So, the same number (and income type) still shows up on your 1040...

    If you want to make it really complicated, your multi-member LLC, assuming you have a mult-member LLC, can elect to be taxed as a S Corp or C Corp. But, doing this is somewhere between more advanced tax planning or kinda silly (especially the C Corp).

    B -- so whats the question? If there is a single guide or book on how to protect the corporate veil that would be great. Mainly, its all about not co-mingling funds / expenses is what I have found. As its been discussed many times in BP forums, LLC's really aren't necessary (and there are those who have an opposite viewpoint) for smaller operations due to the costs, overhead (you already know about the bank accounts), more expensive financing, etc...

    One thing to add as I'm looking over your post again, I have no idea how financing a property in your personal name yet purchasing it in the name of a LLC will fly in terms of piercing the corporate veil. I'm more used to hearing of the LLC being the purchaser and mortgagor while the LLC member personally gurantees the loans. Having split ownerships like this is perplexing to me. Who makes the mortgage payments? The money should come out of your personal bank account. Well, where does that money come from? Are you saying you will transfer funds from the LLC bank account each month (or you need to make the appropriate journal entries) to cover the payments? As a partnership, I don't know if you can technically deduct the interest payments because you, personally paid it. If the LLC is to count it as an expense, how is it doing legally? Are you going to create some sort of contract between your LLC (which is a partnership since its two of you) and yourself? Remember, you need to operate the LLC as a standalone business. Would any other reasonably business owner be making payments on a mortgage that wasn't theirs without some sort of contract? Yup, makes your head spin, huh. Honestly, I sort of stay away from these complications.

    As always, you should seek guidance and counsel from a qualified professional, or two.  Good luck.

    1Reply
  • Dj J.
    OP
    Rental Property Investor · Dayton, OH · Member since 2019 · 3 posts · 2 votes
    6y

    @DavidM. thanks for the reply. Glad to hear it is the same tax situation whether I am owning the property in my name or owning it in my proposed single member LLC.

    Very good nuggets of thought you bring up on your last comment, which is exactly what I am trying to figure out. I've heard from other people on BP about transferring properties to their LLC after they purchased in their personal name but have yet to find the nitty-gritty details of how this works, and how this all is documented and operated in the LLC moving forward

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  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    6y

    @Dj J.

    I think transferring properties from one's personal name into a LLC just has too many permutations. If it helps, here is what I have figured out so far.

    The transference is basically part your capitalization of the LLC so there are no real tax/accounting issues.

    If you have a mortgage, the due on sale clause is an issue/risk.  Either take your chances, let the lender know, or you have to refinance into a commercial loan.

    If you transfer Title via a quit claim deed, I believe you invalidate your current Title Insurance Policy.  So, then you'd have to do a regular warranty deed which includes a closing and the associated costs.

    On another note, why have the LLC and the Land Trust? The former is for asset protection (which as discussed many times on BP can be more cheaply addressed with insurance) and the latter is for anonymity. Yet, you've mentioned none of these as your goals. So, you are going through lots of paperwork and associated costs for no particular stated reason.

    0Reply
  • Peter Walther
    Specialist · Winter Springs, FL · Member since 2009 · 1k+ posts · 747 votes
    6y

    Transferring title by warranty deed or quit claim deed has the same affect on the policy coverage, it continues on under its written terms.  The issue is whether the grantee on the deed meets the definition of Insured as shown in the Conditions section of the policy, if it does, its an Insured under the policy, if it doesn't then its not.

    The difference between the two is the grantee under the warranty has the opportunity to sue the grantor for a breach of warranty if a problem comes up later.  The problem is that there's no guarantee the problem will be covered under the warranty.  Not everything is and not forever.  For example, most warranty deeds except easements and restrictions of record from the warranty.  If the title searcher missed a recorded easement so its not excepted from coverage in the policy and the easement holder shows up and wants to bulldoze a road through the house because it sits on the easement, while there might be coverage under the policy I doubt you would have a cause of action under the warranties because of the carve out.  Yes if your smart or read this post you could prepare the deed without the exception but I doubt you would be aware of all the possible problems or draft the deed to catch them all.

    In my opinion its best to either make sure the grantee meets the definition of Insured or buy an new title policy insuring the grantee.  Yes you'll have to pay a new premium but to do otherwise may be penny wise and pound foolish.

    0Reply
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