In unique position, How to approach first refinance opportunity?

Question

Hello everyone! Long time listener, first time poster :D

My husband and I assumed management of my father-in-laws rental property portfolio a few years ago and have since been working hard to educate ourselves, bring it up to date and apply BiggerPockets techniques and formulas to everything. We purchased the home we are currently living in 2 years ago through the company LLC for an incredible deal of $70,000. We have rehabbed it and gotten an appraisal for $250,000 and are ready to move forward with the refinance stage to invest in future projects. Our question now is, should my husband and I purchase the house *from* the LLC with an FHA loan? Or should we try to just borrow against it under the company name? We are self employed and have never personally purchased a home. We thought this would be a good opportunity to build some credit under our names, but are just unsure of the best option forward and thought we should turn to this great community for your thoughts. We don't want to accidentally do anything shady!

Thanks so much in advance!!!!

Andrew Postell · Answer

@Karissa Green I think you would have a very difficult time in purchasing a property from a company you own.  That would be next to impossible and even if you did it successfully you would be paying a huge amount of taxes.  So just refinancing it would be the simplest method.  In my state if you occupy the property you own personally you can get a tax break and you are very protected liability-wise.  Each state is different of course but you might have MORE protection with this in your own name than otherwise.  Do consult an attorney with this specifically.  And as mentioned above, we need you to get in front of a lender right away to find out what your options are.  That's the best way forward.

Vince Liu · Answer

@Karissa Green Agree with @Andrew Postell purchasing a property from a company that you own will result in a huge tax bill on capital gain because once a 'sale' happens, a 1099 has to be issued, and therefore IRS knows a sale has occurred. I've tried to "purchase property from myself" and have a seller (which is also me) give a 'seller credit' to offset that capital gain tax, but the lender would not be okay with it. Most lenders won't allow any credit bigger than 3% of the purchase price.

That said, if anyone has any creative solutions to work around, please let us know!!

Greg Kasmer · Answer

Karissa - I would call some banks/credit unions and see what there "cash out" refinance options are in and LLC versus your personal names and use that to determine your path forward. I would think that under your personal names you'll be able to get better terms (i.e. longer amortization, lower interest rates, etc...) than the LLC, but I would call to ask. If the personal loan is the way to go you can then quick claim deed the property from the LLC to your names.

In unique position, How to approach first refinance opportunity?

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