All Forum Posts by: Frank Chin

@Gary Northcutt

You never could predict the future in business situations. I'm almost 40 years in doing rentals, and a few years ago, I sold some of them and paid off the mortgages on others. So I'm basically mortgage free. Then, some of my friends say "hey, why are you doing this, you don't have leverage". It's true, real estate values here went up like crazy years after year".

Then the pandemic hit. I don't have that many tenants and one is 14 behind on his rent. At one SFH rental, that's $2,500/month I'm not collecting. So even my tax returns from prior years doesn't reflect this year, where rental income was zero. Some local owners have a majority of tenants not paying.

But I'm doing OK, and the rent assistance program just paid his rent for 14 months. I had financial assets behind me to cope, besides being mortgage free for this SFH, so I'm even up to date on real estate taxes. Many newbies do not, and lenders have to be careful, especially during the pandemic.

 Do an umbrella. See recent discussion: LLC or Umbrella

@Gary Northcutt

Sounds like you're starting out, and for newbies, when commercial lenders consider loan applications, they always asked for a personal guaranty after they review your personal credit, i.e., good income stream, no bankruptcies, past due loans etc.

Having said this, I worked at several lenders earlier in my career. I then switched to the IT field, but at a company that had a finance subsidiary. Their lending policies are quite lax providing commercial loans supposedly up to $2.5 million. They deal with people with spotty personal credit backgrounds, rarely asked for a personal guaranty. What do they do with borrowers that can't pay but come up with good excuses?  They give them bigger loans to cover the bad loan and working capital to continue operating. One such guy wound up owing $40 million and declared bankruptcy. Asked the officer how it happened. Said they started with a $2 million loan, borrower couldn't pay, so gave the guy a $4 million one since borrower gave a good story. Several years later, same thing happened, they had to give the customer a $8 million loan. And on and on till it hit $40 million, they said enough is enough and no more.

Unfortunately, they had several big customers in that situation already and finally had $150 million bad debts on the books. It's a private company I worked for and the owners are older multi-millionaires, each on the verge of retirement. At that point, they have to put in $150 million to stay in business or close up shop. They chose to close up shop.

Having worked at lenders, hearing complaints from folks like you, I can only say "seen it, done it", and if I was a lender seeing a guy with a good story, like "the numbers tell me I should net $1,000/month", take it with a grain of salt, but insist on maintaining your requirements, unless you're a billionaire and writing off $150 million is no big deal. 

I actually chatted with the local owner and he said he would've put the money in but his son is not interested in his business being a college professor in a foreign country working in the field he enjoys.

I only had an issue once, my garage and the next door property garage shared a common wall, and the garages had adjacent balcony above them. No HOA. There was a water leakage, I believe started from his balcony, traveling through the concrete floors and walls into my garage. The original owner used to live next store, was a great neighbor, but sold the property to an absentee owner and it's hard to get hold of him and agree to share in diagnosing the problem and paying for the fix. I finally gave up, got my own handyman, had patches installed that stopped most of the leaking. In rainy seasons, the patched areas look wet.

I own condos in a high rise where they have an HOA. The issue here are water pipes in common walls. If leaks are from the pipes inside the common wall, the HOA handles and is insured. If the leak is from a flood in the next unit, the unit owner is responsible. So instead of just a next door neighbor problem, you got a threesome. So I have to deal with it.

So you got a neighbor problem in each, but with HOA, actually the HOA's PM, it's a little more complicated.

There's only three major methods of transferring title on real estate, namely via sale, gifting or 1031 exchange. Each method are used in different situations, and subject to different methods of taxation. Sale of real estate are subject to capital gains, gifting subject to gift tax regulations, and 1031 subject to maintaining records of transfer of tax basis from one property to another as well as QI's to handle transfer of funds. I don't know of "another way to do something similar".

Properties held in LLC was not mentioned by OP, but not an issue in any of the methods mentioned and only needs owners of can easily quit claim out of the LLC if needed.

Each of these methods include careful document preparation by attorneys conforming to requirement of the laws. If not by sale, 1031, or gifting, I never heard of another way to transfer title. As @Dave Foster mentioned, swapping between siblings could be done either via gifting or by 1031 via simultaneous exchange without a QI. In the case of gifting, property gifted is appraised and valued at current value with gains, though through annual gift limits, lifetime gift limits when used mitigates the affects of taxes. And many people doing quit claim transfers are ignorant of gains involved, assumes none exists, and don't file tax forms required.

I've seen transfer of title situations in estate situations, and most are handled via gifting. Mutual gifting is the best solution in OP's case.

@Andy Collins

Yes, I owned attached properties with common walls with no HOA, and I would have to work with the adjacent owner on common wall, fence issues. These types of properties are very common. In certain states, there are regulations on common fences built on property lines where you would have to obtain the approval of your adjacent owner before doing major repairs expecting reimbursements from the other owner.

It's difficult to answer your questions because we don't know all the details. What is the equity of the properties, how many, how much they appreciated, whether the siblings are married or not, so that you can double your gifting. These are issues that go into estate planning.

It's true that when we did it years ago, when the lifetime limit was even lower, our attorney did it so that the lifetime limit was not used at all, using only our annual limits. Compared to a 1031, the parts that's gifted will in the future have a higher basis, mitigated by the gifting, thus saving you a bundle in future capital gains. With 1031's the basis is carried over. Back then we were able to transfer ownership of a duplex that's owned for a dozen years, half the property with equity of $60K for the half, via a note for that amount, forgiven over 3 years, but actually a little over a year with 3 installments dating the note for Dec 30 for the 1st installment as I described earlier. When we did it, the annual personal limit was $10K/person, $20K per couple.

I don't know what your total portfolio looks like, but when my mother in law passed, she transferred a number of properties to 3 children of hers, all using the annual limits, and the lifetime limit was never used. And the time to prepare and execute the paperwork is only a matter of months, though you can have notes that runs over a few years.

Now I'm talking about doing things by the book. There's an audit done some years back where they found people simply quit claiming among relatives, transferring properties and not filing the required tax forms. But that's a whole another story. At least their looking into it. 

Currently, the lifetime limit will stay at $11.8 million per person, sunsetting in 2026, and may revert back to $3.5 million. But even if you used only $4 million of the lifetime limit, you can reduce the capital gains by several million is you sell the properties in your lifetime because of the higher basis. If you hold on to it till you pass, the lifetime limit becomes irrelevant, it passes with the stepped up basis on death.

Just to add I'm not an attorney but went through these issues when my parents and in laws in their latter tears till they passed.

@Huyen Nguyen

At this stage, for you get umbrella insurance. I had always held my rentals personally and got at least $3 million liability coverage.

LLC is used to reduce your liability exposure. Unfortunately in NY, I was advised litigants sue you and the LLC anyway, so insurance agents I used say that I have to get insurance for my LLC, and in addition an endorsement that covers me personally. I have an LLC for an active business and asked my attorney why if I have an LLC owning rentals, I'm told to get insurance covering myself. He said "if there's a slip and fall due to snow not shoveled, it's you who didn't shovel, not the LLC". How then would I be not liable? Get a PM, a person to manage your property with E&O insurance and you can point to him and say "he's the guy responsible, NOT me". Unfortunately, PM's runs 10% of rent roll. You'll have to operate rentals as a passive investor.

Without the expense of the LLC, or that of the PM, I can go and get $3 millions to $5 million in umbrella insurance. When I asked my insurance agent if $5 million is enough, she tells me for that amount, any insurance company would pay for the best attorneys for you.

@Calvin L.

Yes, you can do gifting.

Some years back, in our family's estate planning, we transferred ownership of properties, and used an estate attorney to do so. You can use "gifting", where there is an annual limit and a lifetime limit where you can do it tax free. For a property or two, among family, in your situation, it's simpler than a 1031.

The annual gifting limit is currently $15K per person per year, and the lifetime limit is over $11 million. My attorney, being a bit conservative, have us use the annual limit to transfer properties gift tax free. Being married, we can transfer $30K/year gift free to someone else, so if I want to transfer a property worth $90K gift tax free, he'll create a note, and have $30K forgiven each year, and it's done over a 3 year period. For efficiency, he create the note to be executed on Dec 30 of year one, forgiven right away, another third on Jan 1, two days later, and then the remaining third the following year. There is imputed interest required, If it's too much trouble, do it in one shot and use the lifetime limit.

We had the properties appraised to make it legitimate. When we hired appraisers, we discussed the purpose, and they asked whether we want a high appraisal (for loans) or a low one (for gifting).

Finally, there are some reporting requirements for gifting, and as I mentioned imputed interest if there are notes. Other than that, it's pretty simple.

@Jacob Eddy

I am in NY state, here where I am, people file suit against you personally anyway even if you have an LLC. That means lawsuits will be against you, Jacob Eddy, and your LLC.

I own rentals in my name, but I had a business in an LLC for reasons other than liability. When I bought liability insurance for my LLC, I was told to get an endorsement that covers me personally since I'll be sued personally anyway. When I obtained the SBA loan for my business, I have to personally guarantee it. So what's the LLC role in all of this?

If I have rentals in an LLC, insurance and loans would include my name on it to guarantee it. So I go through all the trouble of using LLC's and then operate things that the LLC doesn't matter at all.

I bought the business that I placed in the LLC from an owner that had it in an S Corp. He had $1 million liability for the S Corp, was sued for $3 million. He's personally on the hook for $2 million, plus the $1 million. The insurance carrier said their attorney only represented the S Corp, not him, and he should get one representing himself since he didn't have the endorsement covering himself . He tried to get the suit against him personally dropped since the business was in an S Corp but was denied.

Yes, you'll have to have an LLC bank account, loans are given to your LLC with you guarantying it. Insurance to your LLC would have to have an endorsement that also covers you since you be personally sued anyway.