My mortgages to an LLC?

[Yadira Valera]

Hey everyone, my wife and I and her two brothers all own two homes with mortgages still being paid. All 4 of us are on the titles and mortgages. We all live in the two homes too. My wife and I in one home and my brother in laws in the other. Basically we all have two mortgages on our credit report. We were looking to see about an LLC and whether that would be in our best interest to create one now. We do plan on buying more real estate but not for another 2 or 3 years. We would like to know if an LLC is the route to go.

[Diego A.]

You have to talk with your mortgage providers to see if they are allowing you to move them to an LLC.

In rental is good to have an LLC for liability however for taxes there isn't a big difference in small investments.

Your credit report won't show the mortgage anymore but you still have the liability in your history. As soon as you remove the mortgage you will see an impact on your credit report.

Another thing is that you have to make sure the LLC has its own bank account or you will be commingling.

One thing that I am seeing that won't benefit you is that you can't benefit of homestead if you do this which will increase your property taxes though I am not sure how that is impacted in California. In Texas is a big deal.

Homestead has other benefits but those depends on the state too.

[Chris Seveney]

@Yadira Valera

If you transfer property but mortgage stays in your name it still shows on credit

If loan is in the LLC, you may have to personally guarantee it so you would be required to list it as a debt on any new applications

Just a fyi

[Katie Balatbat]

@Yadira Valera

I'm unclear if you are saying that all 4 parties are on title and on the loan for each property, or if you are saying that you and your wife are on title and the loan for 1 property and the 2 brothers on title and on loan for the second property.  If you really mean that all 4 of you are on title and mortgages for both properties, then you may want to look into methods to clean up title, if you desire to separate from each other.  To do so, you'll have several different types of tax consequences to consider: property, income, gift, etc.

There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc. Same goes for number of LLCs and what to fund them with, since bear in mind that CA tends to be more cumbersome and expensive to have LLCs than other states.

California is generally more cumbersome than other states when it comes to taxes and filings. Even if you create a non-CA LLC, if you are managing the business from California, you will likely be deemed to be "doing business" in California and therefore likely subject to CA taxes. California charges a minimum tax of $800 a year per LLC, and more if you have gross receipts in excess of $250k. So, if you create an LLC in another state, you will likely need to register it as a foreign LLC in California. Though, this process will be the same for the other state (if you created a CA LLC you may need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will probably need to pay registration and filing fees in at least 2 states if you don't buy CA property as a CA resident.

Any lawsuits should be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced, some debate as to SMLLC). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. Or, a charging order may be granted.

If you're going the umbrella insurance route, perhaps see if it will cover you for several things including just the routine slip and fall (like mold or earthquake). You'll also want to ensure you have a good property manager to look after the upkeep of the property if you are not there to notice anything deteriorating or which may need attention.

Creating an LLC in California could cost you a minimum tax of $800 every year. You would have ongoing filing requirements with the State and would need to keep business records and documentation. California does not recognize series LLCs.

You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a fairly new 20% pass through deduction you may qualify for that could help you, but not everyone qualifies. You should still be able to get this even if the properties are not in an LLC, if you qualify.

As to your question about the mortgage, you'll want to research something called a "due on transfer" clause to determine if that is an issue for you.

These are all things you will want to discuss with your attorney and CPA. If you need references for either of them in San Diego, let me know.

*This post does not create an attorney-client or CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

[Michael Smythe]

@Yadira Valera guessing you have FNMA/FHLMC/FHA/VA type mortgages?

If so, they CANNOT be moved to an LLC.

They will stay in your name until you refinance or otherwise pay them off.

You can move ownership of the properties to an LLC via Quit Claim Deeds, but you should speak with a tax professional to make sure you understand any tax repercussions.

No idea why all 4 of you are on the mortgages. One can be on the deed without being on the mortgage.

[Kislay Shah]

Establishing an LLC for your real estate holdings can offer several benefits, especially when multiple individuals are involved in property ownership. Here are some considerations to help you decide if forming an LLC is the right choice for your situation:

1. Asset Protection: One of the primary benefits of an LLC is that it provides limited liability protection. This means that the LLC's assets are separate from your personal assets. In the event of a lawsuit or creditor claims against the properties, your personal assets would generally be protected, and only the assets owned by the LLC would be at risk.
2. Tax Advantages: LLCs offer flexibility in terms of taxation. By default, a multi-member LLC is taxed as a partnership, meaning that profits and losses flow through to the individual members' tax returns. This can allow for favorable tax treatment and potential tax deductions related to the properties.
3. Management and Decision-Making: Establishing an LLC can formalize the management and decision-making structure for the properties. Operating agreements can outline each member's roles, responsibilities, and rights regarding property management, maintenance, and financial decisions.
4. Future Real Estate Ventures: If you plan to acquire more real estate in the future, having an LLC in place can streamline the process of purchasing and managing additional properties. It can provide a centralized entity for ownership, making it easier to add new properties to the LLC's portfolio.
5. Credit and Financing: Having properties owned by an LLC may impact your ability to obtain financing or refinance existing mortgages. Lenders may have specific requirements or restrictions for loans to LLCs, so it's essential to consider how this might affect your future financing options.

Before forming an LLC, it's crucial to consult with a qualified attorney and tax advisor who can provide personalized guidance based on your specific circumstances and goals. They can help you understand the legal and tax implications of forming an LLC, as well as assist with the process of establishing and operating the LLC in compliance with state laws. Additionally, consider discussing your plans with your mortgage lenders to ensure that forming an LLC won't trigger any issues with your existing mortgages.