When to deed property to newly created LLC?

Question

I acquired a property, and it is in process of being rehabbed (~$50K equity financed rehab). I am in process of setting up an LLC for this property.  Should I wait till rehab is complete to deed the property, or just go ahead and deed it now?  This is a sole member LLC, and will be an extension of my personal income tax.

A separate question, if I have another property and it is currently being rented -- is there a "best" time of the year to contribute to LLC from an accounting perspective (e.g., contributing 1/1/14 would be best time since only one set of books/records for 2014 onwards).

Arjun K. · Answer

Bill Gulley

I spoke to an attorney today about setting up a Land Trust, coveying properties to the trust, and having the LLC own the interest in the trust.

He said (i) land trust has to be TX as that's where the properties are, and (ii) that transferring the trust interest to the LLC would still trigger the "due on sale" clause.  the main benefit would be the trust transaction would be non-reported; however, the tax payments/insurance payments would reveal the presence of the LLC

Talking to another attorney tomorrow.

Bill Gulley · Answer

Your estate is under NY law, so your estate attorney should be addressing issues there.

I'm saying that any transfer for ESTATE purposes is exempt from the DOS, there can be other reasons, but the transfer must be justified as an estate planning issue. That is not hard to do.

A good estate plan will address all RE management issues as it is designed to adminster your estate on auto pilot so to speak, your RE continues to operate without you.

Your 2, 3 and 4 are not matters that can be best set by stating one structure is better than another, it needs to fit the goals and needs of the owner/beneficiary. This is one ofthose cases where you need a New York attorney (thoght I'd never say that, BTW, LOL) but you do.
Your property could be in France, doesn't matter, you are`a resident of NY.

A trust is a seperate entity, they are formed for several reasons, one being asset protection and liability management.

Rely on insurance to defend you, not any entity to shield you. :)

Arjun K. · Answer

Bill Gulley

I have an attorney currently, but I am not impressed.   As I hijack my own thread: if you live in NY and your properties are in TX -- do you talk to TX or NY attorney?

And to be clear, your view is:
===================
(1) you can transfer a property to a trust, and this will not trigger due-on-sale (even if the lender knows)
(2) The equity of the trust is owned by an LLC
(3) The LLC is in turn owned by me
(4) If there is a claim at the trust-level (beyond insurance), then it would never move beyond the LLC.

Bill Gulley · Answer

The trick is to have a real, liget estate plan, place your heirs in line to conserve your estate. If any lender see you are close, they probably won't do anything, if they do they can call the note, then you musy defend your position, that's where the estate attorney comes in, if it's liget, they lose, pay all costs and jam them. Get your ducks in a row, you can buy 50 properties, if your estate is set up, the due on sale is totally fruitless. :)

Arjun K. · Answer

Bill Gulley

Thank you.

These posts were helpful.  I was ready to go LLC and honestly revisited the Due on Sale debates.. and got freaked out.. and am now evaluating the trust+LLC combo.  Even on trusts it seems folks can't agree whether due on sale is triggered.

I also need to look at my amort.  My only fear on LLC due-on-sale is if rates go to say 13% or so and thats when banks go on a treasure hunt of picking off folks who deeded to LLC. that may not be for 10 years.  so i want to see how much of my loan is paid off by then.   It would suck to lose 3.75% financing!

I wish it was clear that you don't trigger a sale if you transfer from one entity 100% owned by you, to another entity 100% owned by you.

Bill Gulley · Answer

If you are renting it you should already have your depreciation started, your transfer will be at book value so there is not an issue accounting wise.

Since you have them financed, you have the issue of the due on sale, since rates will be going up, you don't want to violate that note. A deed made to grant the property to an LLC will violate the due on sale.

The due on sale has an exemption by law as to a transfer for estate planning. I suggest you consider a trust and set it up as an etate planning matter. If you want/need an LLC, it can be in the or under the trust or the LLC can be a member of the LLC. This should addrss any asset protection issue, if one or both are properly maintained, best defense is insurance.

To know if you need an LLC, consult your attorney and accountant, it will provide benefits for expenses instead of showing your personal computer isn't used exclusively for business, unless you have a real business, better to defend deductions IMO.  Good luck :)

Arjun K. · Answer

Thank you for the replies Dawn A., Tom Goans, Kevin Cubbin

Here is some more background:
- I am young.  There are no heirs to worry about for some time.  I am not worth millions either.  
- The primary goal is asset protection
- This is a sole member LLC
- The properties are all financed for 30 years < 4%.  I am not not planning on refinancing after the rehab.  I may refi down the road, but this is 10+ years down the road, but likely longer than 10 years
  
From what I understand, I thought the best use of a trust would be a land trust that holds the itnerests of the llc, which still owns the property.  the llc provides asset protection, and the trust provides privacy/inheritance benefits.

My question was not meant to be "is an LLC right for me", but rather, "if you set up an LLC for properties you already own, when is the best time to contribute the properties into the LLC -- is there an organizational better time?  financial better time? etc."

Thanks!

Kevin Cubbin · Answer

You should definitely talk to a finance expert which I am not but I do know a few things. If you plan on refinancing and taking money out after the rehab to finance future investments, I would wait until after the refinance. I'm in the same situation now and a mortgage guy told me that if I transfer the property before getting the cash out, the Refi would be corporate loan with a higher rate and less years. Hope this helps

Dawn Anastasi · Answer

If you want to know more about trusts, here is one link:

http://www.dummies.com/how-to/personal-finance/estate-planning/trusts.html

Tom Goans · Answer

Your question would be extremely difficult to address with knowing your entire financial picture, especially your future plans.

You should really ask this question to a financial planner or CPA. It will be well worth the cost. In fact, the cost could be paid for instantly should you make a wrong move.

Sturcturing should consider the present day tax burden, but also include future tax burden, retirement, and heirs.

Some believe a Trust is a better method for financial planning. Land trusts is talked about a lot.

Are you aware many who have accumulated large amounts of money use trusts? You have probably heard of children trusts.

There are way to many considerations to pose this critical issue to a blog, in my opinion.