All Forum Posts by: Clint Coons

J Scott,

Couple items in this thread that I will hit upon. 1st, aged entities is a red flag for an audit and trouble down the road. I have been consulted by the IRS on various asset / tax protection strategies/scams and one area in particular that we have discussed is the use of aged entities for tax deductions. The Service takes a hostile view of persons using entities in this manner. Be cautious. 2nd, the number of properties per LLC should be based on a number of different factors â€" equity, number of units, cash flow, location of real estate, and tenants. For example, you might own 4 properties with a sum total of 50k in equity but one of the properties generates $900 per month positive cash flow. In this situation I would structure my client so the cash cow property is held separate from the other 3 rentals despite the low overall equity. In other words each person/situation is a case by case scenario.
3rd, regarding insurance, it is difficult to find a provider that is willing to offer blanket coverage for all of the properties within one LLC. I have yet to find a carrier that is willing to insure my LLCs in such a manner. I typically insure each property and name the owner of the LLC as an additional insured (I do this to protect the LLC owner/member if the LLC shield does not hold or he is named in the suit.) 4th, single member LLCs are preferred because it avoids the filing of a federal tax return. 5th, in California the franchise tax is a problem so everything must be tempered by cost.
Hope this helps but in the end every situation is unique and must be evaluated against several factors.

The first question you should ask yourself is what do you plan to do with your LLC? If it is your intention to buy and hold property and you plan on using traditional financing then you may want to hold off on establishing a LLC. I say this because you will most likely be required to take title in your own name and any subsequent transfers will subject you to a transfer fee. Understand that I assume you are investing in PA. PA assess this fee on transfers into business entities or land trusts. In many states my clients avoid this fee by utilizing a land trust then assign the land trust to their LLC. Unfortunately in PA this does not work.

If you are buying for cash then this isn't a problem because you can take title directly in the name of the LLC.

If you plan to flip properties or engage in other short term strategies you should consider a corporation or a LLC setup to be taxed as a corporation.

David,

I assume you are concerned about recognizing all of the gain immediately on the installment transaction. As a dealer installment sale rules do not apply and all gain is recognized in the year of sale regardless of the contract terms. I would agree that any attempt to run these sales under a different entity will most likely result in the same treatment because the argument would be made that the purpose of the other entity was purely tax motivated.

Have you considered entering into a lease option for 2 years with the potential buyer. You can always apply some or all of his payments toward the purchase price. Granted the lessee does not get the benefit of an interest deduction but you can always reduce the price to reach an equilibrium. Charles may have another idea.

Todd,

If you were looking to build credit for your corporation then you would want to reverse the transaction. That being said, Dun and Bradstreet wont recognize the transaction because it is between related parties. Also, you will need to report to D&B that your corporation is paying on time. To report you will need to be registered with D&B (you personally). Long and short is if you want to build credit for your corporation it takes time and there is no quick and easy solution. Check out http://www.bossoffice.com/credit on how it is done.

Todd,

I am not sure if you heard or read something about UCC-1 filing and their supposed benefits to delay creditors but I can tell you to tread carefully. A UCC-1 form, also known as a Financial Statement, is used in the commercial context to secure a lender's interest in a borrower's personal property as collateral for an extension of credit. (This also applies to securing a land trust interest or an LLC interest but not the underlying assets of the entity)

A UCC-1 form is typically filed with the state's Secretary of State Office and serves to put others on notice that the lender has a secured interest in the items listed on the form.

A UCC covers "Personal property" meaning non-real property used in operating a business, such as equipment, furniture, and inventory. On a few occasions a client will mistakenly believe that a UCC filing will cover real estate because a box on their form has a place to enter a "real estate description". This description is typically used for timber liens or for general fixture filings that cover an entire parcel of real estate.

Basically, the UCC-1 form serves as a public notice of a lender's interest in the assets for a business. Don't fall into any pitchman's trap about some obscure case or Public law argument lest you end up like Wesely Snipes. Strawman type transaction do not hold up in court and can only lead to problems down the road.

Not that I know of but thanks for the welcome. I look forward to assisting with the posts.

I agree with Charles that the activity, if it is flipping property, should be separated. As I stated earlier running an active business through an LLC in CA (regardless of how it is treated for federal income tax purposes) will increase your tax liability to CA. Simply put I always separate passive activities from no passive for tax reasons and asset protection concerns.

Mitch,

Watch out for CA. LLCs in CA are hit with a franchise tax that does not apply to S-Corps. Another issue to consider is how you will be taxed on active income through an LLC. If the LLC is not set up to be taxed as a S-Corp you will be treated as a sole proprietor.

Lynda,

Whatever you decide do not attempt to set up a LLC for your IRA on your own. If you pay for the setup and perform the work yourself you do run the risk of the Service finding that you made an impermissible contribution of services or assets to your IRA. Our firm has established several IRA LLCs and John is correct in that your operating agreement must contain specific language.

Regarding Nevada, you do not need an Nevada entity unless you are investing in Nevada. The LLC should be established in the state where you plan to purchase real estate. WA LLC protections are very strong.

Ralph,

This isn't even a grey issue in the tax code. IRC 4975 defines a prohibited transaction as follows:

A “prohibited transaction†is defined in IRC §4975(c)(1) as any direct or indirect:
a. Sale or exchange, or leasing of any property between a plan and disqualified person;
b. Lending of money or other extension of credit between a plan and disqualified person;
c. Furnishing of goods, services, or facilities between a plan and disqualified person;
d. Transfer to, or use by, or for the benefit of, a disqualified person of the income or assets of a plan;
e. Act by a disqualified person who is a fiduciary, whereby he deals with the income or assets of a plan in his own interest or for his own account; or
f. Receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.

Unfortunately everything you would like to do with your IRA falls within the definition of a prohibited transaction. Also, using an entity that you own or control either directly or indirectly falls within 4975.

What would you like to do? Do you want to access some of your retirement funds without paying a 10% early withdraw penalty? Give me an idea of your endgame and maybe I can help but the way you mention is not the way to approach a self directed IRA.