LLC Transfer Process

[Shivam Patel]

Hello Everyone,

I am actually relatively new to real estate, but my father actually owns 4 properties under his name. He wants me to take over the business and I have been following Bigger Pockets podcast to learn the business. I found from the podcast that some of the investors transferred their properties to LLC to protect themselves. Now I have a couple questions with the process. I asked my dad , why haven't we done this yet. He told me that the mortgage is under the bank and you cannot transfer to an LLC while its owned by the bank. Is this true? Or is there a way around it? What are other investors doing? Also I was wondering, why even put it in an LLC. Isn't business tax much higher than individual tax, especially since my father is retired. Please enlighten me on this topic since I'm a newbie, and want to learn the in's and out's of this business. I live in the southern area of New Jersey.

Sincerely,

Shivam Patel

[Helen Zhang]

@Shivam Patel Here is my understanding. Please have a cpa correct me if I am wrong. 

1. Can you transfer a property to LLC with a mortgage? It depends on the loan terms. Most of the mortgages allows you to transfer properties to LLC if the LLC has the exact same owners as the property and the mortgage.

2. Do you pay higher property tax with LLC? It depends on how you do it. There are two ways of taxing in LLC, by corporate or pass-through. With pass-through, it is easily understandable. Whatever you make with LLC is added to your personal income, and you will just pay with your personal income tax. With corporate, you can leave your money in and reinvest without taxing. For example, if you flip houses, you only have to pay 15% of the tax on gain. Let's say you make 500k with your personal income, if you do pass through, you will now have to pay a much higher bracket 35%. Doing corporate taxing will allow you to pay less taxes in the short term. When you retire and no longer make 500k, you can then start taking money slowly from your business like 50k a year where you will be only 12% of the tax. (12% + 15% is still way less than paying 35%, not to mention the tax you are paying is progressive). But you get the point, do corporate if you flip to reduce tax, and do pass-through if you do rental so money is not trapped in business in case of a lawsuit.