How to transfer property title from two-member LLC to ourselves?

Question

My fiancee and I own a rental investment property under our LLC (structured as partnership; 50%-50%). The property was bought with cash in August of this year, and it's in San Bernardino county, California. We just found BiggerPockets not long ago and we hired a highly regarded accountant right away. She suggests us to move the property out of the LLC (since we're also doing flipping under this LLC) and hold the title under our personal names.

Can we just do this ourselves without hiring a lawyer or LDA? Some people said it's easy, but also costly if a mistake is made along the way. If anyone can provide a clear step by step process of what to do, I'd like to try to do it ourselves. By the way, how should we title the property? Joint tenancy or tenancy in common? And once we get married, do we have to change the title again?

Thank you!

Curtis Bidwell · Answer

@Stanley Yang I Have done this several times here in Washington State for financing purposes. I simply went to the county and paid a filing fee to file a Quit Claim Deed, avoided any transfer tax by stating "mere change in identity" on the excise tax form. An LLC is a pass through entity, so as long as the people involved are the same there has been no issue. (Never used an attorney to file a paper anyone can do). I can't speak for Ca, but that's what I've done here In WA.

Kevin Romines · Answer

Structuring your business in a way that makes it as easy to do business with the least head aches as possible should be a consideration?

To put yourself in a position where the IRS can call the status of all business in an LLC as dealer status doesnt sound like a wise way to structure things, or does it sound like a wise use of your time and money. Picking a fight with the IRS just doesn’t sound like a good business practice.

Kevin Romines · Answer

The reason the accountant wants the rental split out from the LLC that does flipping is to make sure each is taxed only at its correct tax rate and classification. If you have a flipping business, the IRS ast some point will classify that business as dealership status. All assets that you hold in that same LLC will have the status of dealer and be taxed according to that status. Rentals enjoy a very favorable tax status compared to a dealer status. It only make sense from that one point alone, but there are others as well.

Also the CPA may be thinking of the ease and getting financing and how much more competitive the rates will be when they hold the deal personally. Admittedly that would be secondary to the tax man costs, but still important. Besides, in most cases a well crafted liability policy followed by a umbrella policy will protect you more then that shell of an LLC.

Andrew A. · Answer

@Curtis Bidwell - I'm glad to hear you've been able to handle conveyances independently, but this is dangerous in the extreme for anyone who is not intimately familiar with corporate principles, accounting matters, and even just the simple differences in the types of deeds and exemptions which may apply to each in various situations. I speak from experience when I say, I make a lot more money off of botched conveyances people tried to handle themselves than I do on making sure it's handled properly from the outset.

@Stanley Yang - I reiterate, an ounce of prevention is worth a pound of cure (read as, paying a professional to handle a conveyance is cheap when compared with potential litigation if things go south).

Andrew A. · Answer

Hi there @Stanley Yang - I would typically agree with your CPA, that active endeavors (i.e. flipping) should be held and operated separately from passive income assets (i.e. rentals) due to the varying degree of risk exposure with each. That said, a properly underwritten insurance policy and shore up your risk profile as well, or perhaps better, than splitting ownership into various entities and/or in your names personally. All that said, perhaps there's an accounting reason for the split too, I just wanted to comment on the liability aspects.

As for the process on how to change how title is held, I would absolutely not run the risk of doing this yourself. To take an old quote from Benjamin Franklin, an ounce of prevention is worth a pound of cure. In other words, spend a few hundred on an attorney/title company to avoid thousands if you inadvertently make a mistake.

Lastly, as for taking title as joint tenants or tenants in common, I virtually always recommend that title be held as tenants in common unless and until you're actually married. The reason for this is simple, if something happens to one of you, your interest in the property 'vanishes' into the other's interest, and therefore is not available to go to your loved ones. When you're married, your interests are more likely to aligned as to what disposition the disposition of your property would be in the event of something happening, at least presumably so anyhow.

Best of luck!

Frank Chin · Answer

I agree with Lance, don't do it yourself.

First, there are requirements for executing LLC documents as managing members. I had an LLC and the paperwork is a little different than that of an individual even for opening a bank account.

Second, there might be other accompanying documents that come with deeding from local jurisdictions. My mother in law recently deeded 50% of a property she co-owned with her son to him in San Francisco. It's done through a title company, and there's several accompanying affidavits she had to execute pertaining to local transfer taxes and federal gift taxes.

Third, in NYS state, due to scammers filing deeds taking ownership on properties they do not own to take ownership, they tightened up requirements when deeds are not filed by title companies and attorneys. I read in the local papers two scammers filed deeds, claiming to be nieces of someone at a nursing home, changing ownership to themselves, then took out a $250K mortgage and skipped town. The papers reported officials now believe the filing requirements of simply filling out forms with grantor and grantee names, sending them in, paying the filings fees is just too lax to prevent these types of fraud.

Title companies should be aware of all paperwork required for their area.

Michael Plaks · Answer

No disagreement here, @Kevin Romines.

My point was that holding flips and rentals in the same entity does NOT mean that rental properties automatically4 lose their status. And it is not picking up a fight with the IRS. IRS never raised this argument in my 20 years of practice.

Could separation still be a recommended move? Sure. I do not know the complete story.

Michael Plaks · Answer

@Kevin Romines suggested that "All assets that you hold in that same LLC will have the status of dealer and be taxed according to that status."

This is a common myth. The IRS might try to go that route, but you can defend against such attack if the properties are true rentals.

Your CPA can have some valid reasons to suggest the change, but concern about dealer status is not a very good reason.

Tom Gimer · Answer

The answer to the tenancy question depends on whether future husband and wife would, in the unfortunate event of one of their deaths, prefer that this asset go through the probate process and pass to their heirs/next of kin (TIC) or pass by operation of law to the surviving tenant (JT).

Once married these two would need to record a new deed changing tenancy ... if such a change was desired.

How to transfer property title from two-member LLC to ourselves?

How to transfer property title from two-member LLC to ourselves?

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