Structuring owner-occupied apartment

[Nerissa Vento]

Hello BP members,

My sister and I are looking to purchase a 3 family apartment complex in which she would be using her first time home buyers credit. We will both be living there and we both want to split the cost of everything 50/50 so we are wondering the following:

1.) Can we purchase the property in her name to use the first time home buyers program and then move it to a LLC that has both our names as Managing Members? We want to do this so we can show we each own 50%; therefore, when we go to buy more apartment complexes as investments, the bank will see this on each of our REO schedules (we want to build our portfolios so eventually we will not need to have a sponsor on our deals).

2.) Can we both then receive Tax write-offs/benefits if it's in our LLC?

Overall, we want to know if we each can have both tax write-offs/benefits and show we are 50% owners?

Any advice would help. We will ask our accountant and attorney but I want to be more informed before I know how we should approach this.

Thanks in advance for all your help.

Nerissa

[Jon Holdman]

A LLC is a disregarded entity for tax purposes. Whether or not you create a LLC (or any entity) you and your sister are creating a partnership. The partnership should file partnership returns each year and send K1's to each partner. Each partner will then use the K1's to prepare their own taxes.

Changing ownership from your sister to the LLC violates the due on sale clause in the loan she received. That gives the lender the right, though not the obligation, to call the loan. Because the ownership of the LLC is not the same as the property prior to the transfer, there's more risk.

There may be transfer taxes when you change the ownership.

This is effectively a gift from your sister to you. That also has tax consequences.

A bigger issue is that first time buyers credit. That may well come with strings attached that will be more aggressively enforced than the usual due on sale clause. Better, IMHO, for the two of you to buy it together up front if your intention is to be co-owners.

Another member posted recently that they were having issues getting more loans in the same situation as you will be in. Lenders were counting the entire loan but only half the income in doing the DTI calculation. In this case, your sister would be 100% on the hook for the loan and you wouldn't be on it at all. So she would definitely be in this situation.

Calling a triplex an "apartment complex" is a bit of a stretch.