quitclaim my property to a LLC - do I giveup any deductions?

Question

My wife and I currently own 1 unit in a 3 unit condo building.  We are pursuing a second unit in the building and will need to put our current unit in a LLC.  We will continue to live in this unit and rent out the unit that we are pursuing.

With that said, I have a few questions...

To be sure that I do not trigger a due on sale or transfer clause, should I have my current mortgage company for written consent to do so?

If I do move my current unit to the LLC, will I give up any of the tax deductions that we currently take as homeowners?

Dave Toelkes · Answer

There are problems putting your current unit (the unit you will continue to occupy) into an LLC.  An LLC has to have a business purpose.  What is the business purpose for owning your residence?

Bad idea, in my opinion, for your business entity to own your primary residence.  If you get an owner occupant discount on your property taxes for your primary residence, you will lose that when your business entity becomes the owner.

Your county may charge you transfer taxes and recording fees as well.

Allen B. · Answer

One other problem not mention is that a quit claim deed will end your title insurance coverage.  If you do transfer the property be sure to do use a warranty deed or get a closing agent to get a new title insurance policy.

Even though you may view yourself and the llc as the same, legally they are not.  Just picture the scenario if you sold your property to someone else and use a Quit Claim Deed.  Do the buyers have any recourse if there is a title flaw?

Dave Toelkes · Answer

I now see that you want to put your personal residence in an LLC so you personally do not exceed the 10% ownership threshhold, and you want to use the 203k loan to acquire and renovate a unit that you will put in to service as a rental.

Everything I have ever read about the HUD 203k loan program tells me that it is restricted to owner occupant homeowners.  Investor participation is not allowed.

Additionally, I see the renovations funded by the 203k loan must be spent on the owner occupied residential unit.  Since you want to rehab an investment unit, I don't see how you qualify for the 203k loan program.

If your mortgage broker knows your intended use of the unit that you want to finance with a 203k loan, your broker appears to be enlisting you as a co-conspirator in mortgage fraud.

The penalies are a heavy fine and/or prison.  I would try to find a conventional lender that offers purchase and improvement loans to investors.

Fire that mortgage broker.

Steve Crawford · Answer

Dave T is right on.
Absolutely no problems moving property into an LLC (assuming you and your wife are the sole owners), the deductions and tax benefits will be the same.  But NOT a primary residence.   You can even put a vacation home in your LLC, but if you do, it should probably be one you lease out on occasion.

1.  it doesn't do you any good.
2.  it co-mingles your investments with your home.  Keep your home in your names or a trust.

Mitch Kronowit · Answer

Excellent info Allen. I keep asking why everybody on BP uses QC Deeds all the time to transfer into their LLC, yet my attorney insisted we use a Grant Deed.

Matt Duffey · Answer

Thanks Mark.  Yes, the requirement for the FHA loan is what I am trying to legally satisfy while continuing to live in my current unit and rent out the new unit after the rehab.  Yes, that sounds exactly like what I am not supposed to do - but my lender and FHA independent building consultant are recommending the LLC option as if this is done all the time.

Mark Yuschak · Answer

I'm not sure I exactly follow what you want to do.

But, a couple things to keep in mind which haven't been mentioned.  A 203K is an FHA program.  In order to qualify for it, you'll need to sign your name to language in the mortgage indicating that this will be your primary residence and that you'll be occupying as such.

Also, if you QCD the properties back and forth, it opens the doors to the tax assessor reassessing your property.  If you've fought your assessments down, all of that becomes null and void with a transfer of ownership.

Matt Duffey · Answer

I guess I should clarify the situation after re-reading my original question.

Facts:  
My wife and I are co-signers on our current residence.  
We live in a 3 unit building where 1 unit is vacant, in need of a rehab, and double the size of our current unit.
Our only option is a 203K FHA loan to take advantage of the rehab option.

Issues:
FHA will not approve a deal with more than 10% ownership in the building.

Recommendations:
Our lender who does 203K's has gotten our building FHA approved and advised us to quitclaim our current unit to a LLC before we apply for the 203K.

Questions:
Can this be done legally where we continue to live in our current unit and rent the 'new' unit?

If this can be done and after the loan has been approved, is it possible to transfer our unit back to us out of the LLC and treat the 'new' unit as a rental for tax purposes?

For this situation, I am having a hard time conceptualizing what exactly I can do and how to best approach the situation.

Matt Duffey · Answer

I see.  Thanks for the responses, guys.  How about the same scenario, but as far as anyone but my wife and I know, the unit we purchase will be our primary.

quitclaim my property to a LLC - do I giveup any deductions?

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