Transfering a property into an LLC

[N/A N/A]

How do you go about transfering a property you still owe on into an LLC ?

And..is it even necesary for tax / legal purposes ? Meaning - I'm going to form the LLC for liability protection but wonder if I need to then transfer that property into the LLC ??

pfinder

[Jeff Takle]

While LLCs are handy little suckers, their use for new investors can be somewhat limited in a practical sense. I've started several; the first one I started just to learn how it's done. If you choose to do this for real asset protection or tax sheltering, though, it is worth seeking an attorney because a poorly set up entity will provide neither asset protection or tax shelters. And, to clarify, you don't need an attorney to file the paperwork--that's easy--you should seek an attorney's advice BEFORE filing any paperwork to help you select the right entity structure(s) to accomplish your goal. Here are a few considerations....

1. The short version is--it might not provide you with the asset protection you are hoping for. If you have a single-member LLC and somebody sues you, because the company is a single member entity, they may be able to attach the LLC as your personally owned property and thus make it and the real property subject to a lawsuit against your person.

2. As a pass through entity, LLCs won't provide you with any tax benefits that you wouldn't have by just filing your rental property on a Schedule C on your personal return. However, they may help if you are ever audited for expenses you claim relating to owning and operating rental properties, but ONLY IF YOU KEEP EXCELLENT RECORDS and in no case will it help you if you are cheating on your taxes. If you create an LLC that doesn't have income statements and balance sheets, a budget, separate checking accounts, etc., a court will pierce the corporate veil and will not allow it to provide you with legal insulation. Setting up an LLC is very easy, but like all things, it requires maintenance.

3. There are very few real situations in which having your property owned by an LLC will be an issue. It will only help you if you: 1) are sued for something, 2) you lose in court, 3) the claimant is awarded damages greater than you can afford without selling the house, and 4) you refuse to make a deal with the claimant outside of court. Only in this narrowest of circumstances will the issue of whether or not you hold your property in an LLC even be an issue.

4. In some states (like Virginia) if you own over 4 rental properties, at least one of which falls inside certain counties in Virginia, you are subject to the much more restrictive Landlord and Tenant laws. Some owners have sought to avoid these restrictions by plopping groups of 4 houses into LLCs so that no one entity owns more than four and are thereby subject to the restrictive laws. Unfortunately, Virginia court decisions don't seem to agree and, at best, it's uncertain whether they will give you an exemption from the restrictive rules.

5. Using an LLC will not mask your identity. State corporation commissions and county courthouses both hold LLC paperwork that lists members and addresses. If you want to hide the identity of the true owners, there are ways to do this using trusts, but it requires the involvement of several people--you cannot be both the trustor and the trustee for example. You can do it, but I would recommend getting your specific road map for this from a competent lawyer and shy away from self proclaimed real estate gurus telling you how to outwit tax law--take your advice from a professional or you will not get professional advice. Poorly laid out entities will encumber you with paperwork and fees and not stand up in court. Judges aren't stupid.

No, I am not a lawyer. There is just a time and a place when they are helpful. :shock: