When to establish an LLC - Does timing matter?

Question

Hi BP! We are starting out and would like your advice. We have been reading that there are definite tax advantages to having your properties (as their associated income) contained within an LLC. As we haven’t established one yet, can anyone comment on the difficulty in transferring a property from individual ownership into an LLC, or should we establish the LLC first and have the LLC “purchase” the property directly from the seller? We are just trying to figure out if we need to go through this process now, or if we can wait and consolidate the properties under the LLC at a later date? Thank you, Lynne

Natalie Kolodij · Answer

@Lynne MacFarlane If you're just looking at an LLC for rentals there is no difference tax wise regarding if you have it in an LLC or not. The tax treatment is typically the same. The one differentiating item is if the rentals are in a husband/ wife partnership and you live in a community property state -you have an option of reporting on a partnership return, or treating it as disregarding it and reporting it as normal on your personal return. While this doesn't have a direct tax impact- it can play into strategy in the big picture. Aside from that- it really comes down a question for yourself and your attorney. The LLC setup is more for protection in this situation than any tax matter. However, as mentioned above many people pierce the corporate veil. This is the separation of your business/personal. As soon as you are using personal funds for business/ vice versa....you can potentially open up your LLC and lose some of that protection. Another consideration is the type of property- sometimes lenders want to see an LLC for commercial or hard money loans. If you are looking to do flips the answer changes quite a bit- as it's active income- flips I typically like to see in an LLC because it gives us some options for later on that can provide significant savings.

Lynne MacFarlane · Answer

Thanks @Caleb Heimsoth, I'm new to BP and still trying to figure out these keywords to find the previous topic in search. I appreciate your response! Best, Lynne

Caleb Heimsoth · Answer

Lynne MacFarlane am I correct in assuming you don’t have any rentals yet? This topic is very well worn out on BP so I recommend you use the search function to read some of the older threads. First off there are no tax advantages to a single member llc. It’s a pass through entity and wooo be disregarded for tax purposes. If you’re join a partnership that actually makes your taxes more complicated and probably cost more to file assuming you pay someone to do that. Secondly, if you get a conventional mortgage on a rental and it’s not in your name you may trigger the due on sale clause which means the bank demands the balance of your mortgage in full, immediately. It’s rare but does happen. Finally, while a LLC can provide asset protection it rarely works that simply. If you don’t keep your personal assets separate form the llc that protection can be void. So long story short unless you provide more information you likely don’t need an llc right now. My cpa recommends getting an llc sometime around 15 properties. If you go commercial property or financing you’ll probably need an llc for that. Disclaimer: I’m not an attorney or tax professional. Consult one of each for actual advice

Colleen Goldstein · Answer

What tax advantages to holding property in an LLC? All apply to individual owners as well. In my opinion, the only reason to get an LLC is for liability protection. However, look into "piercing the veil" to see if an LLC will really do what you want to accomplish for liability. In reality, if you're looking for liability protection then just get a larger umbrella insurance policy.Switching the property after the fact won't be difficult, unless you have a mortgage. If you have a mortgage in your personal name, the banks like the property name to match the loan- or may call mortgage due.I'd start with what the end-goal would be to having an LLC and then see if you have other options instead.

Lynne MacFarlane · Answer

Thank you @Colleen McCann Yes, we are looking for liability protection. I've heard folks have been putting their rentals in LLCs and breaking them into different LLCs (different grps of investors). We will be getting a mortgage on our properties. As David Greene says, I have to develop my "Core 4" first but I think it should also include an attorney for that state as well as a CPA.