All Forum Posts by: Brian Schmelzlen

Hi @Jonroy Connell,

You can have your dad and the trust contribute its ownership interests in the house to an LLC if you don't want to continue to own it as tenants in common. I would recommend making sure that MA won't reassess the value of the property as a result of this transfer.

Also, you said that you cannot purchase the property outright but that might not be true.  Have you considered refinancing the property and using the proceeds to buy everyone else out (with you being solely responsible for making the new mortgage payments)?  If you want to start buying out your family, that might be one option to consider. 

Hi @Account Closed,

It is absolutely possible to jump into commercial real estate investing.  If you are looking to do your own deal, there are a few hurdles that you would have to clear.  1) You need to educate yourself so that you understand what is a good deal and what is not.  You would also want to have a good idea of how to add value to the properties.  I like Crushing It by Brian Murray and the BiggerPockets podcast as a starting point.  2) Unless you are bringing in partners (and that is hard to do without a track record and/or a lot of built-in trust) or can structure some creative financing you will need cash.  Seller carrybacks are not uncommon, but you will probably need 10% as a down payment and cash to hold in reserve.  For a larger unit, that can be an obstacle.  3) You need a broker you will be willing to work with you.  Commercial brokers hold a lot of power in commercial real estate investing, and they don't want to waste their time so you would need to be able to prove to them that you are serious and can close.

Hi Peter,

Where the costs listed on your settlement statement go depends upon the nature of the item.  Commissions, transfer fees, etc. are selling expenses and will reduce your gain on sale.  Operational expenses that are included (e.g. pro rata portion of real estate taxes) would go on Schedule E.

Of course, this assumes that the "investment property" is a rental property.  If it is a flip, then you wouldn't have a Schedule E (you would have a Schedule C and everything would be shown there).

If it is a rental property, be sure to include depreciation when determining your gain on sale. 

Thanks for the referral Michael.  I am an attorney, but I don't practice as one (only as a CPA).  I would recommend Katie Lepore if you are looking for a CA attorney.

For tax purposes, neither the receipt of a loan nor its repayment are taxable events. Obviously the interest paid would be deductible by the LLC (unless 263A applies- flips- in which case it gets capitalized) and picked up as income by the lenders.

You should have a promissory note that spells out all of the details.

From a federal tax perspective, there isn't a difference in whether you hold the property through a single member LLC or individually.

As @Matt Motil mentioned, it comes down to 1) asset protection, and 2) financing.

Most people will point out that you can largely protect your assets with adequate insurance. Of course you would have to make sure that you actually do have a large enough insurance policy as it is impossible to predict how much you might eventually be sued for. Also keep in mind that an LLC provides two-way asset protection. It not only protects your personal assets from liabilities originating with the rental property, but your rental property from liabilities that are unrelated to the rental.

In terms of financing, banks do not like lending to LLCs on residential properties if the LLC does not have a track history. However, if you will eventually want to use an LLC it is important to start generating a track history.

We need a lot more information, but just based on the numbers it doesn't look like a good deal to me.

I don't like that there isn't any room to grow the business.  You still have downside risk (there is no guarantee that the business will continue to generate 150-160k per year after expenses), and you said that there is no real upside potential since it cannot make more than it currently does.

I also don't like the cash flow.  Optimistically you make 160,000, and pay taxes on it.  I am going to assume a 40% combined federal and state tax rate just for simplicity.  That means you are paying $64,000 in taxes.  Then you are paying the seller $60,000 per year plus interest.  That leaves you $36,000 per year IF you hit the top of the range of what you expect the business to produce.  For all of the hours that you would need to put into operating a business, that is a horrible return for a business that you don't expect to grow.

Finally, I don't like how much you are paying the seller upfront.  The seller is getting nearly 2x what he/she gets from a year's profit upfront, which doesn't give the seller a lot of incentive to help with the transition.

I am interested in the idea if you want to get it going.

First, I just want to second everything that @Katie L. said.

Second, in regards to your question, if it is a California LLC you only have to file in California until you are doing business in another state.  If you don't have any presence in Texas, you don't have to file in Texas.  Having the intention to eventually do business in Texas does not create nexus in Texas.

I am not an expert on all of the securities law issues, but I have seen gifting of interests in syndication deals to a limited partner's children (cannot confirm that they were minors).  Therefore, I believe it can be done without concern about them being accredited investors themselves.

In terms of taxes, there are two types to be considered: gift and income.  The gift beneficiaries would not be responsible for any gift taxes owed; if anyone owes gift taxes it would be the parent making the gift, but it is unlikely that anyone would owe given the large exclusion amount.  In terms of income taxes, the minors would have to pay taxes on the income the deal generates just like everyone else.  However, the amount of taxes they pay due to the "kiddie tax" would not longer be based on the parents' tax rate.  Instead, the amount of tax due is calculated based off of the trust and estates tax brackets.  That means that the minor children may be paying a lower rate than the parents; although it would not take much income to get to the top tax rate so it is also possible that the child could be paying more.  It all depends upon their situation.