All Forum Posts by: Frank Chin

@Viraj P.

Use an insurance agent.

I ran into this problem some years back when I got my 6th property and the insurance company only covered up to five. My agent switched me to a commercial umbrella temporarily that cost me a lot more.

What she did for me was to locate an out of state insurer that offers residential umbrella, beyond five at a much lower price, and made the switch. 

What's nice is with an agent, she did all the work, understands the market, and worth every penny of her commission.

@Dolly Marketakis

If you are planning to establish your residence, buy a home, Florida has the best homestead laws in this country. See: Florida Homestead exemption discussion It is written into the state constitution and the amount is unlimited. Exceptions are made for bankruptcy, IRS liens, and mechanic liens.

It's protection is so good that corporate raider Paul Bilzerian, sued for millions, $62 million by the government, moved to Florida and paid $65 million for an estate totally shielded by the homestead. That's even greater than the $3 million the seller of the business I know got away with. See Paul Bilzerian 

With all this, still want to put your home into an LLC?

Yes, if you further get rentals, later on, when you have over five or six, you can consider an LLC. For the very first, your home in Florida, absolutely crazy to use an LLC rather than a homestead. It's true when you run into the 6-10 range and beyond, you'll have problems getting residential mortgages with banks not dealing with investors, as well as getting commercial umbrella insurance which cost several times more. But that's a problem for another day.

I used LLC's for my businesses other than real estate. My attorneys as well as my insurance agent insist I buy an endorsement with my LLC policy that covers me personally as well since litigant's sue the LLC's and owner by default, normally for negligence. The other reason is when you get involved with commercial real estate, you'll also have employees which requires workman's comp, unemployment insurance, etc., and in NY, the rates you pay depends on the number of employees and LLC's separates one entity from another.

@Dolly Marketakis

Depending on state laws, if the SFH is going to be your own residence for a period of time, having it in an LLC may prevent you from enjoying full tax advantages of a home in your name, and sometimes, better protections.

See: LLC vs Home exemptions

In fact, I bought a business from someone in an S Corp., owner was sued for $3 million, and the S Corp only had insurance for $1 million. He sold his home in NY, moved to FL, put the proceeds into his home, and the litigants found out they can't go after him. The FL homestead on his home protected him. Would be the same situation if his business was in an LLC. Was advised by attorneys that they normally sue the LLC and owners by default anyway, the owner for negligence, not for instances of co- mingling funds etc.

In your situation, get good umbrella insurance for now.

@Taseen Ranginwala

Here's a page from NYC finance department  NYC assessed values where I am on how the assessed value is arrived at. In my case, the assessed value is much lower than market value due to:

- There is an annual cap on increases for assessed values, where as market values does not. I had the house for nearly 30 years.

- There are exemptions based on age and income. I have one for those over age 65.

- I can contest assessed values which I did for my rentals and had it reduced.

The current market value of my house which I bought at a foreclosure sale is currently $1.2 million per Zillow whereas the assessed value is $72,000. If you invest in NYC, do not use assessed values to evaluate properties.

Bottom line, there is no correlation between the two.

@Trevor J.

Note the following: Home sales capital gain

There is a 2 of 5 year rule of which there are exceptions, if you qualify, in which case you can do a partial exclusion. The linked article shows you how to calculate it. If not, then just wait and do it when the 2 years is up.

@Erwin Mullins

I have bought condos to live in and condos to rent out. I have family members who bought coops to live in. Currently my brother in law bought a 2nd coop in a building when they one they had was too small and thinking about renting it out. Having seen all of this, these are issues to consider:

1. Carefully read the CC&R's. The building I bought a rental condo only designated 20% on the total as rental unit. I bought the 18th rental condo. 

2. Make sure you follow all the protocols. The CC&R says even when I bought the condo designated as rental, I must in addition get board approval. I have a lawyer handling, he expected the approval on closing, knew the board president, but did not receive it. We had to get the resolution from the board president, closing was interrupted for two hours while I went to get it. Good thing I did, I rented the condo, two years later, they changed management companies, and the PM demanded to see if I got board approval. Yep, I got the board resolution, faxed them a copy, and they shut up.

3. I finally sold the condo as I find the board was not tenant and investor friendly. I finally had to submit tenants to the board for approval. They can turn it down, and the board only meets once a month. If I only cash flow $125/month with rents of $600 month, not bad, a two month delay would wipe up my cash flow for the year.

4. The collapse of the Florida condo should be a wake up call. The rental condo I owned needed a new roof. Problem is it's a landmarked building and the new roof costs a million. My special assessment is $10K.

5. Condo board infighting over fees, resulting in special assessment for common utilities. 

6. The coops that our family member owns require residence of so many years before you can move out and rent out. I don't know for how long, but it was a lot longer than two years. If not, you'll have to get special annual approvals if you can get it.

Get it? It's a pain.

@Logan Loughmiller

We had estate planning done not long ago, and had our home and a rental placed into a revocable trust. We appointed our daughters as trustees, and power of attorney  granted to the older one. All it really means is if something happens, my wife and I are in our seventies, they have the authority to take over, and in the event of death, the properties does not have to be probated, and does not have to be in the will. The property goes to them.

But in the meantime, if we plan to sell a property, either the home, or the rental, no problem. We are still the owners of record. 

My mother in law passed not long ago, my wife is named executor, her home was not in a trust, and the amount of work she had to perform to probate is is much greater than properties in a trust. There's three siblings, and there was some disagreement and grumbling over who gets what, and what percentage. Her MIL verbally told my wife and her sister gets her home, but never got around to specify in the will or a trust. The other brother can legally contest it if he wanted to. He already inherited property during MIL's lifetime and knew it. Being the oldest sibling, and fortunately also the executor, my wife made the final decision, which she was allowed to do and they fortunately respected. If not, the state can take years to settle.

However, whether the property is in a trust has no effect on you as a buyer.

Just wondering, did the tenants of the rental paid rent to the LLC? For 1031 purposes, the owners of record for the relinquished property and replacement property must be the same, which is what you said, and if the 1031 time limit for identification is OK, there should be no problem from the 1031 standpoint. If not the QI would notice and not proceed. For management reasons, often tenants are often told to pay a person or entity that is different than the owner of record, usually the property manager or property management company. Somewhere along the line, the management company would transfer funds to the owner so the owner will report the income. But if the LLC is a disregard entity, the transfer is not done, the profit is declared by the LLC, not the owner, there should be no issue as the income is declared and proper taxes paid. The owner and the PM in your case is the same. I assume this is so from what you describe.

Looks like the relinquished property would be listed in the 2020 return. The replacements will be on the 2021 schedule E.  The relinquished property owner should be the same as the purchaser of the replacement property so I would make sure with their QI that it is so. They did use a QI, didn't they?

As Dave Foster pointed out, the CPA should also know which forms to file.

@Uzair Syed

When you do a 1031, you usually 1031 into a replacement property of higher value. I assume you did the 1031 sometime in 2020. There's three property entries that goes onto the schedule E if you 1031 one property into another of higher value.

1. The original property. You'll list the income expenses including depreciation for the original property on the schedule E. You'll have this in the 2020 return.

2. The replacement property is truncated into two. Replacement "1" is a continuation of the relinquished property, and has the basis and depreciation of the original. The depreciation will be that of the remaining life of the relinquished  property.

3. Replacement part "2" is the boot, the part of the value greater than the original. It will have it's own cost basis and depreciation schedule. Income and expenses will be prorated between part one & two.

Beginning in 2021, you'll have two properties listed on the schedule E, replacement part and two. In the future when you sell, replacement part one and two will each have it's own depreciation recapture and capital gain.

Now this is if the 1031 is into a larger property. If smaller, you'll have a negative boot, and you'll pay capital gains on that one. You can 1031 into more than one property.

The LLC is merely a past through, so you do the schedule E for the portion of the year you have the relinquished property for accounting purposes. If they completed the 1031, they would have done it through a QI, and the CPA should contact the QI to make sure the what names they used for the relinquished property and the replacement property, which be the same.

I have talked to CPA's and many are not familiar with accounting of 1031's.