How can I move my existing rental into LLC(or some legal entity)

Question

How can I transfer my existing rental into a legal entity (like LLC). Appreciate any referrals to accounting or legal firms specializing in investment properties in Arizona. Thank you

David M. · Answer

@Ashley Chris

I don't fully agree with @Steve Furst .  The LLC does incur additional costs.  For example as mentioned, you are no longer eligible for conforming residential loans, so you have to use commercial financing.  transferring title and forth for a loan has been discussed time and time again on bp and it would seem to potentially mess up your corporate veil.  Furthermore, you only get the limited liability for what the LLC owns...  To protect/maintain your corporate veil you have to more cleanly manage your books, pay bills, etc. when you have a LLC.

The umbrella policy only covers what YOU own.  So, you'd have to get one for yourself (i.e. to cover your personal residence, auto, etc.) and another policy for each LLC that you use.  You need to treat the LLC as a completely separate entity.  People sometimes forget that and see it as an extension of themselves which legally is considered using it as an alter-ego which pierces the corporate veil.

Have you consulted with a qualified professional or two?  Also, what hasn't been made clear is how many Members, i.e. owners, will be in your LLC?  At least at the Federal level, a single member LLC is considered a "disregarded entity" for tax purposes so you just fill out a SchC for it.  However, if you have a multi-member LLC (e.g. you and your spouse/significant other), then you need to fill out and submit a partnership return and give yourself a k-1 form so you can file your personal taxes.

However, back to your OP, suggest you look at the Network section of BP to see what professional are signed up here.  Good luck.

David M. · Answer

@Andre M.

Take a look at these two posts about umbrella policies.

https://www.biggerpockets.com/...

the reason its called an "umbrella" is since it covers other base policies.  Thats part of the advantage of keeping the ownership/Titles under one name/entity.  Now, you only need one policy.  For example, if you put one Title per LLC, then each LLC needs an umbrella policy should you so desire that extra protection.

Good luck.

Steve Furst · Answer

@Ashley Chris  You can save yourself some big bucks by going to your local title office and simply having one of their officers draft a quit claim deed and file it with the county. No need to have an attorney do this - the title officer will do the same and not charge you $500 (which most attorneys will do.)  Further, you can set up an AZ LLC at the Arizona Corp. Commission website in about 15 minutes, so no need to pay for this piece either. The establishment of an LLC in AZ is very straight forward.Respectfully, I don't agree with @Chris I.'s statement about not getting an LLC, or about the tax complication piece. In terms of transferring title to an LLC, it is easy and cheap. The protections provided by an LLC include:

• Protection of other assets via the mechanism of the 'corporate veil' - ie: should someone sue you and win, they would only have access to assets held within the LLC (which should only be one property). Further, this would only come after they were able to ding your property's rental insurance. In the case of negligence, where your rental insurance or umbrella policy do not cover you either to the full amount or because of some clause or term which inhibits coverage, you're exposure is limited to solely that property. Everyone thinks they won't be found negligent until a situation arises where they are. Why take the risk for the small time/monetary cost of an LLC?
• The LLC structure provides both privacy for you as the owners (retention of some sensitive information, such as your other holdings, assets, etc. in the event of a legal situation), and acting as a shield against both legal suits, and prying eyes who may wish to look into other assets you might hold.
• You also want to avoid your umbrella insurance being hit with a suit, should it arise. Much better for a claim to hit your rental property insurance first and not go straight to this more-expensive policy.

In terms of tax, you simply roll your subordinate LLCs up to a Holding Company, which provides the ability to deal with tax implications in bulk, for all assets, but also provides an additional layer of protection for your non-real estate assets and your personal information/identity. There is no cost to do this, and you can do it yourself on the AZ Corp. Commission website. The benefit here is that you are able to file taxes for a single entity as opposed to many, which will help significantly when you acquire more assets. It doesn't replace the need to keep P&Ls for each deal, but saves a ton of admin/paperwork repetitiveness for your CPA come tax time, thereby saving you dollars.

In terms of your umbrella policy question, you would get a single policy that covers you, your spouse/kids, your vehicles, pets, jewelry, home, rentals, risk exposure, etc. They are pretty comprehensive, which is why they're called an umbrella policy. Again, I must respectfully disagree with @Andre M. as you DO NOT need a different umbrella policy for each asset. This would be duplicate coverage, and your insurance agent will tell you this if you contact them. A single policy will cover all assets, and you simply add assets to it as your acquire property.

I hope this helps to clarify a few of these topics. Cheers!

Andre M. · Answer

Does one get an umbrella policy for each property? (Not even sure that exists). Or do you just get one big umbrella policy for everything. And how much do you get?

David M. · Answer

@Mike S.Good point.  Better than trying to see if somehow the Title Policy will transfer.

Mike S. · Answer

@David M.

Do not use a quit claim deed. Use a warranty or special warranty deed instead.

Chris I. · Answer

@Ashley Chris  Why bother?  You can just get a decent size umbrella insurance policy for the rental(s) and be fine from legal issues.  Forming an LLC just makes your taxes more difficult.  And all the income from the LLC would just flow into your individual tax return anyways.  Also the way David describes is the technically correct way to do it.  But most people I've talked to never do the second step of refinancing into a commercial loan.

David M. · Answer

@Ashley Chris

Of course, consult with a professionall... but you would form the entity, such as a LLC, and then you would quit claim deed the property to the LLC as part of capitalizing the entity.  At the same time or shorly thereafter, I would refinance the property with a commercial loan by the LLC so that the loan is in the LLC's name (assuming the property was already financed).  That's the real short of it.  A couple other things that float to mind is make sure your Title Insurance policy is still in effect (unless you don't need it) and make sure there aren't any other State specific issues you need to handle.

Does that help?

How can I move my existing rental into LLC(or some legal entity)

Most Popular Reply