Buying llc along with property

[Neha Mittal]

I came across a property and taxes for that are low. The seller said he will create a new llc and transfer the property to that llc, then I can buy the llc. This way  the state will not reaccess property taxes. Is it fair and legal? Will a bank finance this kind of deal? Or maybe a private lender?

[John Lenhart]

There is a lot in that question. What you are describing is a drop down entity transfer. As far as fair goes, that depends on your individual perspective. As far as legal, it depends on the state. In Ohio it is very legal. In Kentucky it is not. Florida has rules to make this hard too. So it depends on the laws of the state where you are buying.

In re to banks financing this type of deal, the answer is yes and no. Yes, banks will finance such a deal in almost all cases, however, to protect their risk, they will underwrite it as if the taxes were paid to the purchase price (Or a %) even if they are reassessed much lower. So, if it can pass the rigorous stress test of the bank and the state does not reassess, it could be a home run.

states are trying to limit the use of this loophole so it is getting harder to use. However, the trick has become quite common in the last 20 years