Tax implications of moving property into LLC

[Dan Robinson]

So it's pretty clear (to me at least) that I should be moving properties titled in my name into an LLC based on the recently passed tax bill. They have been in my name for several years now. Are there an implications with respect to recaptured depreciation if I change title? Any other things I need to watch out for?

[Mike H.]

I am NO CPA so please consult your own. But my understanding is as follows:

I believe there was a change in the tax law that said for pass through entities (assumed to be s corps and llc's), you can deduct 20% of the net income of the business.

So if your rentals were showing a net profit of 10k a year after all expenses, depreciation, etc, and they were on your personal return, you'll be responsible for paying taxes on the entire 10k - which is what occurs today.

However, if you were to move those rentals into an LLC or S Corp, they would presumably have the exact same 10k in net profit for the year. Under the new tax law, you would get to deduct 2k of that net profit so only 8k of that profit would be passed through to your personal return and you'd only pay taxes on 8k instead of 10k.

If you're in the 25% tax bracket, you'd save $500 in taxes by switching it over. And then you'd probably pay $300 to 700 a year to renew your entity with the state and another 300 to 500 extra for your cpa to do the entity's tax returns.

So I'd be hesitant to create a pass through entity unless you're showing a significant amount of net profit. Most investors have enough depreciation to offset that income so we're still not showing much if any profits. But at some point, if you're showing 20k to 30k or more in net profits, then I would think it would likely be worth your while to move your stuff into the LLC.

In terms of the tax implications, thats another question for your cpa. But my understanding is that as long as your properties are currently in your name only and as long as the entity you move them to is a pass through entity where you are the only member/owner of that entity, there would be no tax implication.

The issue may come into play as to whether you're lender has an issue with you deeding the property out of your personal name and into the entity. Typically, they're ok with you doing that with a trust. But some lenders don't like them getting deeded into an entity.

The risk there is that today you may be the sole owner/member of that entity. But tomorrow someone else may become a partner which could entitle them to some ownership stake of the property that they would then go after should the partnership/corporation entity have issues.