Buying an LLC that owns real estate

[Galen Miller]

I'm under contract to purchase an apartment building in Ohio. I have the option to purchase the real estate or to form an LLC, transfer the property into it and purchase the newly formed LLC that owns the real estate. The primary motivations for purchasing an LLC that owns the real estate is to avoid the potential of a significant property tax increase and to eliminate conveyance fees. My question is whether this will this cause issues with setting up the purchase price as the cost basis and depreciating the property accordingly? I've seen some stuff online that suggests I might assume the previous owners depreciation schedule (which would be bad because they've owned it a long time). I also came across a 754 election which is one process for adjusting the cost basis to the purchase price. Any advice on this issue is greatly appreciated! Thanks!

[Kory Reynolds]

Keep it simple.

With real estate it almost never makes sense to acquire LLC units over acquiring the assets.

When you acquire LLC units, you are also acquiring any unlisted liabilities of that LLC - say someone had a trip and fall 3 weeks before you bought it, and then they sue the LLC a week after you close on the purchase... now it's your problem. There are some states (like NH) with some unique issues as well about the step up in basis of the underlying asses - where you could end up inheriting their state tax liability. You may also be acquiring leases that you don't want to be stuck in.

Generally if you acquire LLC units, you will be able to at least get a federal basis step up in the underlying assets.

Also generally when you acquire LLC units, most states still trigger real estate transfer taxes. State pending, this could also trigger the re-assessment anyways.

So if you want to get creative, make sure you hire some competent attorneys to advise you. My recommendation is unless there is a REALLY good reason for doing LLC units instead...just buy the assets.