Another question in the what if category. I am curious to the details and differences between purchasing a rental property from someone who owns the property through a LLC or just buying the LLC. What tax or other issues does this bring about or is it even possible to do this.
Just buy the property. If you bought the LLC then you would be liable for any dept the LLC has or any future lawsuits.
The plus side is you could own an LLC with an established history, this could be good if they had anything in the name of the LLC (like credit cards) and paid on time. You now have an established business with established credit and history. There are always pros and cons.
Eddie is correct about being concerned about previous activity with the LLC. However, that is easily checked out before the sale of the LLC takes place.
In our case, we always sell the LLC. Less paperwork, the property already is set up in an LLC, the property has built in seasoning in the LLC, and we use this method to wholesale deals.
Joe. Thanks for your answer. How is it different from just selling the property. How does the whole structure work.
If I just have one property in an llc and want to get out of the business then I sell the property and disolve the llc. The sale Is typical with new financing and change of title and the like.Taxes are done the following year and I am done. if I sell the llc, how does that affect the underlying financing. Is there any tax differences.
It sounds like everything is the same with the simplicity you described except that the llc transfers ownership but I just didn't think it would be that easy...
It CAN be that easy. It depends on how old the LLC is and what "attachments", such as loans and other debt that has been accumulated by that LLC. Let me give you three examples:
1 - Let's say an LLC owned a property for 5 years (the # of yrs really doesn't matter), and over those years it has attached a number of business credit cards, LOC's, etc...along with being on title with the property. If you were to sell the LLC, whoever bought it would be liable for all the other debt. Not really sellable.
2 - That same LLC did not have anything attached to it other than being on title for the property. No credit cards, not LOC's, nothing else. That is sellable. That is clean.
3 - An offer is made on a property in the name of an LLC. That offer is accepted. You sell the LLC (actually this is just another form of assignment) before you close. The "right" to buy that property moves with the sale of the LLC, and the new LLC owner/member closes on the accepted offer. We do this all the time, for a long time. This is how we wholesale HUD, REO, FMA, etc... No need for a double closing.
When you buy the LLC, you get all the assets and you get all the liabilities. Debts would be a liability that you would take on. The underlying financing could have some interesting points to consider. Is the lender going to call the note (presumption that the financing is commercial)? Does the personal guarantee of the original member(s) stay, or does it go away to be replaced by the new member(s)? If I'm the lender, I'd like to add personal guarantee(s) from the new member(s) and not release any previous personal guarantees - all the better to secure ability to collect on the debt.
I think @Bill Gulley could give us some further input ...
Thanks for the info. I really appreciate it. The only question I have left is what is the process to sell and llc?
well one more. Lets say I have a property worth $200,000. I have a commercial note on the property through the llc for $150,000. If I want to sell the property for $175,000, can I sell the Llc with existing financing in place and then seller finance the remaining $25,000. What say does the bank have in this case as I have a personal guarantee on the loan in the llc.
The note with the bank likely has language regarding a change in ownership interest of the LLC. I would never let someone take over/buy my LLC with my personal guarantee still attached.....suicide. Putting financing aside, if you bought a property in an LLC say 5 years ago for $100k, and now the LLC's basis in the property is say $100k (depreciation subtracted, capes added) and you sell to me for $200k. If I buy the LLC my basis in the property is $100k, not $200k. If I need to sell the property later, because I couldn't sell the LLC, for $250k, my Taxable gain from the property is $150k, not $50k. To me, selling the LLC usually only makes sense in doing the flippy do dah, to avoid assignment/resale restrictions....not for longer term holds.
Your real estate tax liability is assessed to the date of sale and you credit the buyer and the buyer pays as taxes are due, generally. If you sell to a partner in the LLC, your true tax liability flowing through to your personal taxes may be different than the buyer's liability you'll need to negotiate that. If it's a sale to an unrelated buyer you can credit a buyer if there is a liability, there shouldn't be as you close out the books to the seller who assumes the tax liability and the new owner begins.
Wayne pointed out some tax issues there but the assets can be reevaluated at sale, and should be, listing valuations making up the sale price, then the new owner uses the cost of acquisition as book values. This is rather a split approach, buying assets at market and clearing out inventories and repurchasing under the same name, you need to see your CPA or tax advisor/authority. If assets are not addressed and split then you'll have the issues pointed out.
I wouldn't buy a 5 year old real estate LLC, I'd buy one created last month if I was on top of the entire process. Suppose you had a bad tenant you kicked out a year ago and didn't follow legal requirements. This is a contingent liability to the LLC, the tenant may have another year or two to sue for wrongful eviction.
When a company is sold there will be representations and warranties addressing contingent liabilities and future claims arising from past activities. A Hold Harmless and Indemnification agreement is incorporated in the sale contract and that may only be as good as the seller's ability to pay damages, can't get blood out of a rock you know, so you could be stuck with future claims as well as illegal activities that might constitute fines against the company.
Any financing with a personal guarantee is unique to that party and consent by the lender will be needed for a buyer to assume the loan. Otherwise, you're in the same boat as buying subject to the mortgage. A lender may or may not release you from a personal guarantee
Even when loans are made on a non-recourse basis, the lender is relying on the experience and management of the company owner, changing ownership with management can put you in the same situation of having a loan accelerated to maturity.
I'd suggest you sell the property out of the LLC, pay off the mortgage and simply shut the LLC down.
Selling a business that has been created to be sold isn't too much trouble, selling a mature business is a real pain if done properly. You need a list of assets held, a financial statement past tax returns, insurance assignments authorizing the new owner to act, bank accounts closed or signature cards changed, a change of officers and directors with the Secretary of State, most likely a change of any designated agent, utility accounts changed which could result in deposits returned and new deposits paid. Prepaid deposits retained along with prepaid taxes or insurance premiums should be adjusted. Lien waivers for any work accomplished back to the term of statute of limitations should be obtained. Liabilities accrued need to be adjusted and paid. I suggest you make a public notice of the sale too if you want to keep your reputation, sometimes if a buyer is paying for blue sky you're stuck being generally known as the guy responsible in the public eye. Often you'll have a wind down period agreement as to assisting in management, this is a seller's liability to perform over an agreed period. Things pop up arising from past business and you can be required to address such issues with due care and diligence in a timely manner. Any warranties on personal property may only be made to the original buyer even if it's a company, selling the company is selling the assets and a transfer of property. At settlement you'll need to prepare your tax reporting forms and 1099/98s as applicable. Check local tax requirements for the assessor and collector as well.
In settlement of the sale consider statements, disclosures, representations and warranties that address each of these issues. Depending on the company and it's past dealings there could be more issues to address as well. This is pretty much why I wouldn't buy a mature company, I would buy the assets but the name and history of a mature company would need to be valuable, clean and auditable for me to consider it and suffer the brain damage. Larger RE companies usually allow the seller to remain inside to a limited capacity having them phased out over time too, it's a service business and services are personal with the management of that individual being critical to operations. Lots of things to consider.
That's why I suggest you just sell the property and shut the company down. Sorry to hear you're getting out of RE! :(
Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com
I am most certainly not getting out of real estate. I am looking at closing my largest deal ever actually. I was just curious as to the process and if there were and benefits and what the negatives were.
Bill it sounds like you disagree with Wayne then that the basis of the property stays the way it was prior to sale. That doesn't make sense to me as I am aware of businesses structured as an llc selling with the buyer refreshing depreciation and the like with the plantand equiptment. Llc transfered to a wholly owned subsidiary of another company.
Thanks for your insights...
No, not disagreeing with Wayne as I mentioned, if you don't assess valuations and offset amounts with the sale you'll have that same basis.....and probably small deals are done that way as you'll need an accountant along with your attorney.
Okay, glad you're not leaving us! :)
Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com
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