Rental income go to LLC while owning the property personally?

Question

Hi,

I have an agent that I use that invests personally, and she has the property under her trust, but all her rental incomes/expenses goes into her LLC, while both the LLC and the trust are wholly owned by her. My situation is slightly different in that 1) my LLC is multi member between my wife and I, 2) the loans I have on the property are conventional loans (can be called if the title transferred) under my name.

Does anyone know from tax and legal purposes if there are any issues with owning the properties under my personal name (some properties are under my name only, and some are 50/50 between my wife and I.  All mortgages are only under my name), while having all the incomes and expenses run through LLC owned bank account?  I see a lot of questions about getting conventional loan then quit claim the property into an LLC, so was wondering if there is an issue with this method (which eliminates the risk of bank calling the conventional loan).  Thank you for your help in advance.

David M. · Answer

@Michinori Kaneko

In my layman's opinion, you've got it all screwed up.  this is brought up on BP nearly daily.

You truly attain the asset protection of the LLC, both the Title and mortgage needs to be in the LLC.  One simple way to look at it is regarding co-mingling (the sure fire way to pierce your corporate veil).  Who makes the mortgage payment?  Since you gave the mortgage, you should be paying it but then you have no way of deducting it as an expense.  If the LLC makes the payment, then its paying for a personal mortgage, not one given by the LLC.  That is just one example.

Continuously/ making a pattern of taking the loans out in your personal name and quit claim deeding it to the LLC only makes the LLC look like an alter-ego of yourself.  Again, corporate veil pierced.  I've yet to have somebody on BP bring up an argument to this, much less a reasonable one.

Regarding using the Trust, if the Trust is made from the LLC, i.e. the LLC is the grantor, then I believe its okay.  When you have it split where the property is granted into the Trust from your personal name and the LLC is doing the renting, then the property has no separate legal asset protection.  Basically, the LLC is a management company who should be leasing out the property for your (you'll need an arrangement/contract between yourself and the LLC).  I believe there is some protection here because the mgt llc will be named in the lawsuit which protects the property since its not under the mgt LLC.  However, I believe they will just name you as well in the lawsuit and the asset is still in jeopardy.  Besides, the proper way to do this is to hold properties in LLC(s) and have a separate mgt LLC do your leasing for you. That's how to structure it separate the liabiilty and achieve the legal asset protection.

If you want the asset protection of the LLC, you have to pay for it.  That means getting the commercial loans.  Basically, you probably only think you have a corporate veil to protect/separate your personal assets, but if you had a lawsuit it seems like you have a rude awakening.  Check out any of my many posts where others have weighed in as well.

Regarding taxes, it really doesn't matter whether you hold the properties in your personal name or under an entity in your case.  The deductions you can take are exactly the same.  A multi-member LLC is taxed as a partnership and its a pass-thru entity.  All your profits/losses will be taken on your 1040 (single or multi-member LLC).  The LLC/entity is really only for asset protection, not tax benefits.  So, if you want the asset protection, you need to follow the rules/law and don't co-mingle your funds and operate the LLC as its own entity as a minimum.

I hope this helps.  Good luck.

Michinori Kaneko · Answer

@David M. I can try asking but I doubt they would do that but guess i could give it a try!

David M. · Answer

@Michinori Kaneko

Yeah, is it really worth the $50 to jeopardize your LLC's corporate veil?

How about "moving" that Chase Ink card to your LLC and out of your personal name?  They wouldn't be qualifying you for another card...  Would that be worth a try?

Michinori Kaneko · Answer

@David M. Well sort of, yes.  Chase Ink card is a business card that gives 5% points on cables/internets/office supply.  I have that in my personal name (made one before I had an LLC) and right now with this COVID thing chase is really tight with business card approvals so i know I won't qualify if I applied for another with LLC name.  I was more thinking about it as my chase freedom card (personal card) has a one time offer where I can get back to like $50 or something 10% cashback on AT&T and i use AT&T for an apartment building I own.  This apartment was the first one I did everything in LLC from the beginning (except for some expenses I incurred before the creation of LLC) so I wanted to keep it clean as possible, but tempting to get those "Free" rewards.  I guess at the end of the day I can "do" whatever I want to but I need to think about if that $50  (well, more to come in the future though) is worth something going wrong down the line and could potentially pierce the corporate veil. Thanks for your input.

David M. · Answer

@Michinori Kaneko

I'm not really sure about using your personal credit in that manner.  I think it depends on your State's juriprudence and legal precedence.  I guessing it won't fly because you aren't really operating the LLC as a separate entity.  MAYBE if you had legal agreement between yourself and your LLC that you personally are providing the AT&T service and thus the LLC would be reimbursing you...  But, is that a valid ordinary and regular business expense?  Sure, but in that manner?  I don't know.

Is there a business credit card that provides similar rewards?

Michinori Kaneko · Answer

@David Daily Yes I am aware and I've read many threads but since this was coming from a lawyer of my agent, I thought maybe I was missing something.  At this point I've maxed out my personal loans, so any further investments will be under LLC name to begin with so I will have no issues.

Out of curiosity, would think using a personal credit card would cause the same issue? For instance, if I had an AT&T service for a property held in an LLC, and my personal credit card had 10% cashback on AT&T, If i use that credit card to pay for AT&T bill for a property held in LLC, then the LLC bank accounts pays for the exact amount to the credit card, would that still be consider mixing, or would be treated as someone paid for you, and you are reimbursing them?  Thanks for sharing your thoughts

Mary M. · Answer

@Michinori Kaneko please hire a professional to help you.  It will be $$ well spent

Michinori Kaneko · Answer

@Aaron K. the issue here is if the property is owned at LLC you can't get a conventional loan which gives me access to 30 yr fixed low interest mortgages.

@Benjamin A Ersing i don't understand your point. I do use a property manager, but that doesn't protect me from legal standpoint (yes I have insurance but would like the additional protection I can enjoy from owning the property under multi-membership LLC.  Under this, even if I get sued and owes a massive liability, they cannot take away the actual properties, just the income generated from it).

Benjamin A Ersing · Answer

I'm not an attorney or an accountant, and have also been wrestling with this question, so take this worth a grain of salt. That said, I don't think there's an issue provided you're actively managing the property yourself and running the LLC like a property management company (i.e., tracking income, expenses, issuing receipts to tenants, contracting with tenants, etc.).  If you were paying a 3rd party property manager, they would have an LLC which would be doing all the above, and there wouldn't be an issue with you owning the properties in your own name and them managing it.

Again though, this is the conclusion I have come to based on my reading - if there's a lawyer/accountant on BP who can opine, would love a professional's perspective.

Aaron K. · Answer

@Michinori Kaneko maybe try refinancing the loans as your LLC and just personally guarantee them.

Rental income go to LLC while owning the property personally?

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