Rented Out My First House--Now What?

Question

Hi Folks,

I'm new to the BP community and real estate investing in general. It's good to be here! In the last couple months, my wife and I were successful in renting out our first house (our former primary residence of 3 years) in the foothills southwest of Denver, CO. We bought our second house (new primary residence) in the Twin Cities area to accommodate some life changes. I have some questions about how best to have this long distance rental property. We have a good property manager who got some great (so far) tenants in on Dec. 1, and we got our first "check" last Friday. (Super Exciting Stuff!!!) We also set up an umbrella insurance policy to protect ourselves. Any and all thoughts and suggestions are welcome!

First, I'm wondering if we should transfer the house to an LLC? I've generally read that this is a smart way to provide yourself an extra layer of protection, but our property manager thought it would be bad for tax reasons (which I don't get, I thought LLC's were pass through entities). If we should do the LLC, does it make sense to incorporate in Colorado (where the house is) or Minnesota (where we are)?

Second, I'm thinking we likely need to get serious and get a CPA. They supposed to pay for themselves and TurboTax just ain't cuttin' it anymore, right? Do you see more value in having a CPA in Colorado (where the house is and last year's taxes were filed), or Minnesota (where we now live and will file in future years)?

Lastly, should we be asking these questions of a real estate attorney, or is that overkill? We're likely only going to have the one rental property for the next few years. If so, same question on location applies. Best to have one that knows the local laws, or is near you?

Brittany Guimond · Answer

Congrats!! Sounds like you're off to a great start! Here are my thoughts:

1. Moving the home to an LLC has pros and cons, I recommend chatting with BOTH a CPA and a lawyer to understand all of the implications. Also keep in mind, there is likely a "due on sale" clause with your mortgage that might call the loan due if you move it into another name. We have not personally moved ours into an LLC yet, but from what I've heard, this doesn't happen often. If you decide to move it into an LLC, you would reach out to a title company (I like Land Title) and ask for a quit claim deed.

2. 100% yes, it makes SUCH a difference having a human being available to answer questions. There are so many nuances. I recommend finding a CPA in Colorado who either specializes in real estate or has rental properties themselves. I use Troy Vigil at Elite Tax & Accounting and he's been great, but I also listened to this BP podcast recently that featured a CPA specializing in real estate: https://www.biggerpockets.com/blog/on-the-market-165

3. Again, I say yes to an attorney, more so from the perspective of knowing what the laws in the state are today, and being briefed when they changed. I would have been in a tough spot if I didn't know about the pet fee law and the radon law that both changed, and my RE attorney was the person who told me about those and helped me alter my leases to accommodate the changes and protect myself. I use Lyndsey O'Connell, she's been great to work with: https://www.ocolawgroup.com/

Jerry W. · Answer

@Andrew White, my first thought is that you don't need an umbrella policy if you only own one policy.  It will be cheaper to just increase the insurance on your one property.  Umbrella policies are designed to add coverage for multiple properties at a cheaper rate than increasing insurance on every single property.  Next I would hold off on doing a change to an LLC until at least 3 years after you have moved out just in case you decide to sell it and want to claim the $250 capital gains exemption from it being your primary home for 2 out of the last 5 years.  After that you might consider if you want it in a corporate entity to reduce liability.  Congratulations, and best of luck in your investing.

Nate Meeker · Answer

@Andrew White - The location of your CPA isn't as crucial as their experience with real estate. Many CPAs on this forum have clients and properties across the U.S.

Andrew White · Answer

Thanks all for the great recommendations and advice. I didn't know what I'd get on here, but this has really given me some good stuff to look into. I'll be sure to look into "due on sale" clauses, keep in mind the 2 out of 5 rule on the capital gains exemption, foreign entities, Landlording on Autopilot, etc. Really appreciate the referrals as well @Brittany Guimond!

Rented Out My First House--Now What?

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