Can a multi-member LLC (filing taxes as a S-corp), collect rent and claim taxes on a property (as if the property WERE in it's name) when the deed is under one of the LLC co-owning members personal names?
This question comes from the fact that I'll need to take out a mortgage in my personal name in order to finance the property, and will want to transfer the deed to the LLC afterwards, but I'm not sure of how long the processing time will be in making that happen, and if their will be a current tenant in the property that will have rent that needs to be collected, etc...
Thanks in advance BP'ers!
Very confusing question.
Let me simplify:
Can an LLC collect rent (and receive it in as "income" to the LLC) if the property isn't owned by the LLC? (In my case, the property would be owned by ONE of the two members in the LLC.
Of course it can. You can direct to pay the rent to anyone. In this case you will have your tenant pay rent to the LLC . You can structure it the way you want to.
You can direct that the rent be paid to the LLC, but the property is in your name and you will be taxed on it. See Wikipedia entry for "assignment of income" and another explanation here: https://www.accountingweb.com/tax/irs/what-is-the-fruit-of-the-tree-tax-principle . As explained in the article, the Supreme Court came up with the "fruit of the tree" principle in a case in which a father tried to transfer some income to his son without first having paid tax on it. The US Supreme Court ruled that "the fruit of the tree cannot fall far from the tree on which it was grown." What the court meant was that once income has been earned, you can't avoid tax on it by transferring it to another person.
For example, you can’t shift tax on a winning lottery or sweepstakes ticket by giving all or part of it to another person after the winning draw. To shift tax, you must be able to show that you made a valid assignment of all or part of it before it became a winning ticket.
The proper way to do this is to hold the property in the name of the LLC and get a loan in the name of the LLC. It is fairly common for LLC members to personally guarantee loans to LLCs. That said, there may be some creative ways to do what you want to do, but I would recommend talking with a CPA about it. Best thing to do is try to do it the right way.
If I was a member of your LLC, I would want the property held in the name of the LLC, because that gives me indirect partial ownership of the property which can secure my investment.
I agree that you should talk to a CPA. Though there is nothing stopping you from directing your tenants to make out their rental checks to your LLC name. Doesn't matter how the property is held. You can view it just like being a property management company at that point.
Why would the deed only be in one of the members names? That would make me uncomfortable. I would submit a quit claim deed to have the property titled into all of the members names. Or into the name of the LLC. This is pretty simple and it shouldn't take very long.
For what it's worth, I asked a RE attorney about triggering the due on sale clause if you transferred the title of a property into the name of an LLC. He said that he's only seen that happen once in his 25+ years of practicing, and in that case the bank demanded the borrower put their name back on the deed within 30 days (of course they complied). He certainly made it out to seem like having the deed to a property in an LLC name, while there is a mortgage in your personal name is no big deal. I still wonder about that though...
Wow thanks for all the input everyone! To be sure, I want to do everything the right and legal way! Further clarification - the other LLC member is my father which explains the slightly casual approach with the titling before deed transfer. I’d love to get loan in LLC name but it doesn’t seem possible from few lenders I’ve spoken to.
I am hearing most feedback about income is acceptable to be collected by LLC while title is in my personal name, but still outstanding is in my original question was about the tax implications. Is there any way to have the tax advantages be claimed under the LLC, when titles in individuals name if LLC is collecting the income?
If you have a two member LLC this will be taxed as a partnership, which is a pass through entity for tax purposes. Meaning you get taxed at your personal income rate. Doesn't matter if you hold the property in your name or in an LLC, or where the rent checks are being made out to. You will be taxed at your income tax bracket in all cases. There is an exception, where you can have an LLC taxed as a corporation, but that doesn't sound like what you're doing.
The only difference would be for filing. If you have an LLC being taxed as a partnership, you will also need to file a schedule k-1. This basically shows distributions from your LLC to the members. For this reason, if you go to a tax preparer, they will likely charge you more to file if the entity you operating out of is an LLC.
The big take away is that you will be taxed at the same rate regardless if your entity is an LLC, partnership, or joint venture. Filing taxes might be marginally more expensive if it's an LLC/partnership.
Oh, I also want to ask what you think is the advantage of collecting rent under LLC? Since the property is not actually titled to the LLC you don't have liability protection that the LLC normally provides. You may want to look at umbrella insurance. I don't really understand what you are trying to do here.
You can not do that unless you buy the house cash or with a commercial loan. Banks do not allow you to transfer your deed over to LLLC without jumping through a lot of hoops (closing cost, review of LLC, etc.).
Your other option maybe to net lease (NNN) property to an LLC where LLC pays all expenses and deals with the tenant and in turn pays you or your father master rent on the property. It's a bit more complicated but it may solve your concern of not transferring property to LLC in order to avoid due on sale clause.
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