Scranton, PA area -- LLC?

Question

Hello,

Looking to become an investor in the Scranton, PA area.  I live locally.

My initial plan would be buy/hold duplexes and eventually larger multi-unit properties in the suburbs around Scranton, such as Dunmore, Dickson City, Olyphant, etc.

My plan is to find a property by the end of the summer.  My question is should I form an LLC prior to purchasing a property?  It seems that this would help with personal asset protection, and forming and transferring property would seem to be more difficult after the fact.

Also, any recommendations regarding a lawyer who could help me with this step and others would be appreciated.

Thanks,

Dan Brown

Bob Derwin · Answer

@Carmen Falcone there are 2 active groups that I belong to in Luzerne County.  The NEPA Real Estate Investors Network meets monthly at the Perkins restaurant in Pittston.  There is no charge for this group.  This group is more investor oriented.  We have folks that come from as far away as Williamsport and New Jersey, but a majority of the members are from the greater Scranton/Wilkes-Barre area.  We meet on the 2nd Wednesday of every month.  Meetings run from 7 to 9 or so.  There is usually a guest speaker, or a member of the group will speak about a real estate investing topic.  After the speaker, we have networking time, to get to know what each other is doing, and discuss deals, etc.  The next investors network meeting is set for Wednesday August 14.

There is also the WVREIA (Wyoming Valley Real Estate Investors Association).  This group meets on the last Tuesday of most months (there are no meetings in July, August, or December).  This group was more landlord oriented, but we are in the process of recreating ourselves to become more balanced between landlording and real estate investing in general.  There is a nominal yearly fee for this group (I believe it's 55 dollars), which is used to cover soft drinks, a sandwich tray, and renting of meeting space.  This group meets in the Dolphin Plaza on Rt 315 in Wilkes Barre (between the casino and the Woodlands).  Again, this group tries to have guest speakers.  In the past we have had an insurance agent, a magistrate, insurance adjuster, flooring store owner, and many others guest speakers.  The next WVREIA meeting is set for Tuesday September 24, meeting starts at 7.

Marcos Paulo Cerra · Answer

Attorney James J. Zaydon can help you out when it comes to forming an LLC if you are going to go with private or hard money financing.

Carmen Falcone · Answer

@Bob Derwin can you give me some more information on these meet ups. I had no idea we had something like that here in pittston

Chris K. · Answer

Unless there is some kind of approval from the PA Department of Revenue on the exact language/method you rely on, parties at the closing are taking a gamble. That's especially true when it's a topic that the PA Department of Revenue has paid close attention to for over a decade. Now such a letter ruling or a bulletin may exist. If you have it, it would benefit the BP Community a lot if you share it.

In general, I do think there are situations where it is worth taking a gamble on. After all, reasonable people can interpret a statute differently. And Pennsylvania Courts have held that it will read a statute in favor of the taxpayer when there is any ambiguity. With that in mind, it may make sense to take the risk of: (1) the reward is good/great; and (2) you could make a reasonable argument as to why you are right.

I would, for example, put the option method used by wholesalers in PA as falling in this category. Yes, it's true that the PA Department of Revenue did not expressly rule on that method either. But there is enough room in the statute to make the reasonable argument that termination of an option is not a taxable event. So if wholesalers want to avoid all the headaches that can come from assignments, I would consider it to be a viable option despite the uncertainty.

But here, I'm having a hard time seeing why anyone would take the risk. Opening a single-member LLC is a de minimis cost. Even if the deal falls apart, you could always use the same LLC for another deal. So why take the risk when the PA Department of Revenue prepared 14-page memo on the topic?

Below is what the Department had to say about this topic. I personally wouldn't take the risk based on what it says.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Kate Daye Ruane · Answer

Hello Chris, there is a way to properly write the agreement of sale / offer to allow this to be closed and recorded in the LLC. It’s nothing sneaky and no transfer takes place. This way the LLC can be created by your attorney at same time that they are handling closing. We do it every day :)

Chris K. · Answer

@Kate Daye and @Daniel Brown

So there might be situations where you could avoid paying the realty transfer tax twice. But the PA Department of Revenue has argued for decades that that entering into a contract as an individual then assigning or transferring property to an LLC owned by the individual can be taxable. See this Bulletin for more details. Scenario 2e and 2f probably are the best examples of what can go wrong. There are examples showing when you could avoid it --- but they generally involve you opening an LLC before the sales agreement.

The PA Department of Revenue has does periodically audit transactions. Now for smaller properties, the damage is arguably minimal. Pay the tax/fines and move on. But if you buy bigger properties in area like Scranton where the realty transfer taxes are high, the damages can be catastrophic.

Since the cost of forming a single-member LLC is around $400 to $800, I cannot really think of any good reason why someone shouldn't just form the LLC before entering into a sales agreement. PA Department of Revenue can be a ferocious foe.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Kate Daye Ruane · Answer

Absolutely! Many buyers choose to put each house/property under their own individual LLC and even name the LLC after the address to keep it straight. All depends on your strategy and goal! But as far as timelines go, it’s both feasible and common. Your attorney can take care of it all for you. Hope that helps!

Daniel Brown · Answer

@Kate Daye

Thanks for the reply!

In the scenario you describe above of having an attorney create one during the closing process, would that be feasible with traditional financing?

Daniel Brown · Answer

@Chris K.

Thanks for the input, a lot to consider here!

If my wife and I form the LLC together, will that reduce some of the risk stated above re: the participation theory?

I do feel that asset protection would be important, though I'm not sure if I'm being overly cautious, and perhaps I should start with one or two properties and worry about the LLC once I have gotten my feet wet.

Will send a PM.  Thanks!

Daniel Brown · Answer

@Bob Derwin

Thanks for the replay.

So is an LLC basically a non-starter for traditional bank financing, or is it more a case of having to jump through several hoops?

Thanks for the invite to the REI Group, I will try to go next month.  I had a family commitment tonight, but it sounds like it would be a great idea.

Scranton, PA area -- LLC?

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