Any way to move properties with a mortgage into my LLC?

Question

I'd like to move some rental properties that are currently held in my name into my LLC for liability protection.  These props. have mortgages which, of course, have "due on transfer" clauses.

I'm guessing that the only way to move them to the LLC would be to refianace them, but am hoping somebody might have some other ideas.  It would be nice if the lender (Wells-Fargo) would allow an assumption by the LLC, but I don't think that's likely since they would lose the ability to go after my personal assets if I defaulted.  In my opinion, that doesn't seem like much of an issue since the loans are all at less than 80% LTV.  If they allowed the assumption, they would benefit by keeping good performing loans versus loosing them if I have to refinance.  I think maybe with current events, they would just as soon have the cash from a payoff.

Anybody have any ideas?  Thanks.

JMac

J Scott · Answer

Just something to think about before moving property into an LLC these days (not saying it's the wrong thing to do for asset protection, but you should have all the facts):

http://www.taxloopholes.com/connect/blog/diane-kennedy/2008/05/do-you-have-llc-you-might-not-

John M. · Answer

OK, so I've finally gotten things in place to start moving my rentals over to my LLC.  What are the tax implications of doing this?  Would this be considered a gift?  How should I report the transfer on my return and on the LLC's?  Thanks for any advice from those who have done this before.

JMac

Jim Smiley · Answer

I have a question that hopefully has the same answer.  In addition to our own house, we own a house that we rent to our daughter.  Since we're going overseas for about 3 weeks in July, we'd like to develop a Revocable Living Trust before we go.  So, I'm wondering if I can use the 'quit claim' deed to transfer these assets into the RLT so we don't want  to refinance.

Thanks,  Jim Smiley
Montclair, Virginia

Kevin Schick · Answer

I've done this numerous times as well with no impact, even from the banks that know full well that I did it.  They did not think it was an issue.

I would tend to agree also that with all the problem cases out there right now, the last thing they would be spending time on would be calling in well performing loans, especially at LTV of 80% or less.  They got a whole lot of other problems to keep themselves busy with.

BMR

John M. · Answer

Thanks for the replies.  Maybe I'm just a little dense, so please bear with me.  I see now that transfering the property shouldn't compromise the lenders lein on the property -- it would be like buying/selling subject to the existing financing.  So how should I communicate or talk to the lender about it?  Should I just do it and not tell the lender anything?  Don't I need to change the mortgage into the the LLC's name and address to establish "separateness" and liability protection.  If my name is on the mortgage and I'm making the payments and receiving the statements, etc. it seems that would seriously compromise my liability protection and defeat the whold purpose of transfering the deeds.  It seems to me that I need to get the lender to allow an assumption by the llc, right?

JMac

Jon Holdman · Answer

You are not going to be able to change the mortgage from your name to the LLC name.  That's just not going to happen.  At best, you would have to refi, and get the new loan in the LLCs name.  It might be looked at as a sale (you selling to the LLC) and then it would be a purchase money loan and a significant down payment would be required.  Just start sending in the payments out of your LLC account.

Jon Holdman · Answer

If the lender does get upset with you moving the property, you can quit claim it back to yourself.

Doing the quit claim won't affect the bank's interest in the property

Richard Warren · Answer

This is something that I’ve done numerous times.  I’ve never had a problem.  One lender simply had me sign a document attesting to the fact that I am the sole member of the LLC.  However, you may wish to check with your state regarding transfer taxes.  In Nevada it was an exempt transaction and not subject to tax.

8)

John M. · Answer

Jon, 
If I do that won't the bank loose their security interest in the property?  I'll still be on the note and responsible for the debt, but they would loose the ability to foreclose if I were to default.  I've heard the same advice also, but IF the lender was to call the note due, I would be faced with the very difficult situation of having to pay off the properties or attempt to re-finance under much less desirable terms than I currently have.  In short, I can't just cross my fingers and HOPE they won't call the notes due without some addional assurances because if they did, the consequences could be devastating.

I've heard people say that the bank would be foolish to call in a performing loan, but I also think that in todays climate they are more concerned with maintaining solvency than maximizing profit.

JMac

Jon Holdman · Answer

Just file a quit claim deed that transfers them to the LLC.  Since you control the LLC, the bank won't (or, at least is very unlikely) to call the note.  The note remains in your name.

I know others here may disagree with this approach.  But, I've discussed it with numerous people, including my banker, CPA, and mortgage broker, and every one gave the same advice.