All Forum Posts by: Clint Coons

@Donald Hatter It is always ideal to purchase property directly under an LLC to avoid the need for a subsequent deed transfer. However, for most investors, this isn't always a practical option. Unless you are obtaining a DSCR (Debt Service Coverage Ratio) loan or working with a community lender through a portfolio loan, you will likely need to take title to residential real estate in your own name at the time of purchase. These two loan types are among the few exceptions that permit closing directly in the name of an LLC.

Most of my clients initially take title in their own name, then later transfer the property into an LLC or land trust for asset protection or tax benefits. In these cases, the mortgage remains in the name of the investor; however, the LLC typically handles all mortgage payments moving forward.

@M Amin You may want to exercise caution when using a series LLC for commercial property. Typically, commercial properties are financed in the name of the entity that holds them. When using a standard LLC, the process is generally straightforward for lenders. For example, the entity is registered with the state, providing transparency and avoiding title issues, which makes lenders more comfortable with the arrangement. However, a series LLC presents more challenges because of its opaqueness. With the exception of a few states, the individual cells within a series LLC are not filed with the secretary of state. This lack of registration can create complications for both lenders and title companies, as they may view the structure as less transparent or reliable.

Texas has recently made changes to its series LLC laws to allow for cell registration, which is a step forward in addressing these concerns. However, in my experience, even with these changes, lenders are often still hesitant and uncomfortable with financing properties held within a series LLC structure. For this reason, I typically recommend using series LLCs for single-family homes, where the structure can be more practical, and keeping commercial properties in their own separate LLCs for simplicity and to avoid unnecessary complications.

In terms of management, I always advise structuring the series LLC with a separate management entity to address the concerns you raised.

Your family members can be members and still qualify.  https://www.tn.gov/revenue/taxes/franchise---excise-tax/exem...

Alex,

The mortgage remains in the borrower's name, so it's crucial to avoid triggering the acceleration clause when transferring a property into an LLC. In some cases, this may not be a concern if the loan is owned by Freddie Mac or Fannie Mae. If that's not the case, consider using a land trust as an intermediary to safely transition the property into an LLC.

Pardeep,

TN is tricky because unless you and your family members are members in the LLC, you won't be able to qualify for the FONCE (Family Owned Non-corporate Entity) exemption from the TN franchise tax. This exemption is designed to provide tax relief for family-owned businesses, so failing to meet the requirements can add an unexpected layer of tax liability. This makes the usual structure that works in most states—such as a Colorado LLC member-managed by a Wyoming LLC—unworkable in Tennessee because it will disqualify you from FONCE. I've encountered several out-of-state investors who have unknowingly made this mistake with their structuring, only to face unnecessary tax complications.

However, all is not lost. If you want to maintain anonymity for your TN rental properties, I recommend using a TN Series LLC that is member-managed by a WY LLC. This structure allows for anonymity while still ensuring compliance with FONCE requirements. Each individual cell you set up within the Series LLC would be owned by you directly, qualifying each cell for the FONCE exemption.

On the anonymity side, it's worth noting that the cells of a TN Series LLC are not recorded with the Secretary of State. This means that if a third party researches the owner of a specific property, they will only find the parent LLC, which is held by the WY LLC.

If you're wondering whether the parent LLC will be subject to franchise tax, the answer is no. The reason is that the parent LLC does not own any real estate itself—it simply functions as a management entity. I hope this helps.

Typically, I avoid using a series LLC in Illinois because each cell requires state registration. While this structure offers great asset protection benefits, it doesn't necessarily save money on filing fees or administrative costs. For this reason, I often recommend setting up separate LLCs for Illinois investments. Additionally, managing series LLCs can be challenging, especially when it comes to opening bank accounts or handling titles for individual cells, which can create unnecessary complexity.

I’m also a proponent of always having at least two “shelf” LLCs ready to go for deals so that you don’t run into delays or roadblocks when opportunities arise unexpectedly. Shelf LLCs are pre-established entities like you mentioned in your post.

However, if you prefer to avoid setting up shelf LLCs, using land trusts can be a simple and effective alternative. Land trusts can be established the day before closing and do not require state filing to create. In Illinois, my preference is to use land trusts with a separate LLC designated as the beneficiary. This structure combines efficiency with enhanced privacy and protection for your real estate investments.

Ultimately, there are plenty of ways to structure your investment real estate strategy, and the best approach often depends on your specific goals, the nature of the transaction, and your preferences for simplicity versus control

The first factor to consider is Proposition 19, which will trigger a reassessment of property taxes if the home is transferred to either of your father-in-law’s daughters. Unfortunately, this reassessment is unavoidable, so you’ll need to evaluate whether transferring the property is worth the potential tax increase.

If a Transfer Is Not Feasible:

If the potential property tax increase makes the transfer impractical, an alternative option is for your father-in-law to secure a Home Equity Line of Credit (HELOC) on the property. This may require a co-signer, such as yourself. Once the HELOC is in place, your father-in-law could loan you the funds to invest in real estate. To safeguard his interests and those of his other daughter, the loan could be secured against the property via a deed of trust. This may take the form of a second deed of trust if the funds are being used as a down payment on an investment property with a conventional loan. Either way, your father-in-law's position is protected.

The investment property should be held in either a land trust with an LLC as the beneficiary, or directly under an LLC. Typically, this structuring takes place after the property is purchased.

If a Transfer Is Feasible:

If you're comfortable with the property tax increase, the property can be transferred to both daughters, followed by a lease agreement with your father-in-law. The lease would establish income, which can be used for loan qualification purposes. Your wife and her sister could then apply for a HELOC on the property, using the funds for investment purposes.

If you are the primary investor, the new property should be held in an LLC, with your wife and her sister as the members. If your sister-in-law prefers not to be directly involved, your wife could become the sole owner of the LLC, and your sister-in-law could be given a secured interest in the home after the HELOC is obtained.

Additional Considerations:

You mentioned owning two other properties. If you haven't done so already, consider protecting these assets under a legal structure, such as an LLC or trust, to ensure they are secure.

Set up the LLC in Michigan (MI). If you choose to set it up in Illinois (IL) and then file as a foreign entity in MI, you will end up paying two state filing fees, which unnecessarily increases your costs. Establishing the LLC in IL first does not provide any additional benefits in this scenario. If you prefer to maintain privacy and don't want your tenants to know you are the property owner, I often recommend a two-entity strategy. This involves creating a Wyoming (WY) blocker LLC, which will act as the member-manager of the Michigan LLC. This setup adds an extra layer of anonymity and protection. Regardless of your approach, forming an LLC is the smartest choice for protecting yourself from potential liability caused by the numerous tenants you will be hosting in your property.

Before transferring real estate into an LLC, it's essential to consider the following:

1. Transfer Fees or Property Tax Reassessment

Some states impose a transfer tax or reset the property tax basis when property ownership is moved into an LLC. To avoid these costs, a common strategy is to set up a land trust to hold the property title. Land trusts, in most cases (except in Pennsylvania), are exempt from transfer taxes and reassessments. The process involves deeding the property to a land trust and then assigning the beneficial interest of the trust to an LLC for asset protection purposes.

2. Due-on-Sale Clause

If transfer taxes are not a concern, the next consideration is the due-on-sale clause, which could lead to loan acceleration. Fortunately, if your mortgage is backed by Freddie Mac or Fannie Mae, transferring an investment property into an LLC will not trigger acceleration. In 2017, Freddie and Fannie updated their guidelines to allow such transfers. To check if your loan is owned by either entity, use their loan lookup tools:

• Fannie Mae Loan Lookup Tool
• Freddie Mac Loan Lookup Tool

  3. Loans Not Owned by Freddie or Fannie

  If your loan is held by a private lender or another institution, it's important to evaluate the interest rate. For pre-2022 loans with lower interest rates, direct transfer to an LLC could risk triggering acceleration and result in refinancing at a higher rate. In such cases, using the land trust-to-LLC strategy can mitigate this risk.

  For newer loans with higher or comparable interest rates, the decision largely depends on personal preference—whether to transfer directly into an LLC or use the land trust strategy.

  Final Thoughts

  In my 27 years of practice, I've encountered fewer than 20 cases of loan acceleration, and most involved creative financing or FHA loans.

Dave,

Here are a few points to consider:

An umbrella policy only covers you when your underlying policy pays. If your landlord insurer refuses coverage then you are without protection from the Umbrella. Further, some claims such as mold i.e., environmental are not covered under your policy, earthquakes, floods, drug labs.

A land trust does not offer asset protection but it does provide "due on sale" protection for transfers into LLCs.

A LLC will provide ample protection for a relative modest outlay. When considering protection, keep in mind that once your LLC is in place it costs very little to maintain (annual state filing fee is typically less than $200 for most states).

Typically for an investor such as yourself I would recommend establishing a land trust to hold title to your rental and a LLC to hold the ownership of your land trust. Once you close on the property, deed your rental to the land trust and subsequently assign your beneficial interest to your LLC.

If properly set up, neither your trust nor your LLC will require a tax return. Also keep in mind that you can place more than one trust in a LLC. I typically advise my clients to hold up to $250k in equity and no more than 4 properties per LLC.

Kind regards,

Clint Coons