All Forum Posts by: Clark Peterson

Hi @Dallas Jacobsen, I’m pretty sure the answer is no. I work regularly with a tax lawyer who knows this stuff inside and out. Let me check with him and report back. 

Capital gains exclusion on primary residences is $500k if married and $250k if an individual. There are also certain other exclusions that can be applied as well which can be found here: https://www.irs.gov/publicatio...

Note that if the home is passed on as part of an estate the heirs acquire the home with "stepped up basis" meaning they owe no taxes on the accumulated capital gains since the home was purchased. 

I'm skeptical that the transfer of the trust is going to save you any taxes. 

Hi @Daniel Murphy, 

As @Bjorn Ahlblad mentioned, an LLC with an operating agreement specifying each owner and their capital contributions would probably be best for this scenario. In the operating agreement you would care for such things as splitting the finances, decision-making and management, etc. You could do the same with a tenancy in common (TIC) and a co-ownership agreement. LLC might be best because it provides the most flexibility in terms of changing and transferring ownership interests over time, which might be useful given that your children may want to move on sometime in the future.

Clark  

Hi @Matthew Graves, 

Sounds exciting! No, it shouldn't matter at all that they're in different states. Your lender will structure it appropriately. And they should also be able to work with you on the land loan as well. All about finding the right lending partner! 

Best, 

Clark

Hi @Abhimanyu Aditya, 

This all makes sense. I don't foresee any issues with the structure you've laid out. The most important thing is working with a financing parter who knows their way around DSCR loans and vesting in LLCs. Setting up the LLC and executing the operating agreement is the right first step!

Hi @Ryan Galloway, 

You’re on the right path here. Here are the steps to take. 
1. Form your LLC in the state the property resides in
2. Create an operating agreement between yourself and your sibling

3. Get an EIN for the entity from the IRS and set up a bank account tied to the EIN
4. Deed the property from your names to the LLC using either a quit claim deed or warranty deed
5. Record the deed at the county recorder

I know it sounds like a lot of work but it’s very doable and there are a lot of services to help me this all easier and mostly online. 

Feel free to reach out if I you have any questions! 

Clark 

No problem! Then the answer is pretty simple: no, you don't get to take the personal income tax benefits associated with homeownership. But you get to take advantage of a much richer and greater variety of tax benefits for your rental investment property. The LLC will not enable you to take advantage of any incremental tax benefits beyond those, but it is likely the right legal structure for a rental investment for purposes of limited liability, asset protection, flexibility, and governance. 

Hi @Dan N., 

This question comes up a lot with the clients I work with who are looking at owning properties for a mix of personal use and rental investment. A couple of key tax benefits many are familiar with are the mortgage interest deduction, the state and local property taxes deduction, and the capital gains exclusion on the sale of primary residences. These all apply to individuals who own homes primarily for owner occupied purposes. When you get into the rental investment property space, there is a whole new world of tax benefits that heavily favor real estate properties held as investments, such a depreciation and cost segregation studies, general deducibility of business expenses, and 1031 exchanges (relates to capital gains). 

If you're not planning to own a home for rental investment purposes but own it in an LLC to, for example, accommodate a multi-owner vacation property, you may deduct interest paid on your home mortgage(s) if the mortgage amounts on your primary residence and secondary home are no greater than $750,000 (if married filed jointly) or $375,000 (if married filing separately or single). If your combined mortgage balances exceeds those thresholds, you may still be permitted to deduct the interest you paid on your home mortgage, but the amount of deductible interest will be phased out or limited.

To be eligible for the home mortgage interest deduction, you will have meet the following requirements: 1) you file an individual tax return on IRS Form 1040, or 1040-SR and you itemize your deductions on Schedule A; 2) you owned a home that is secured by the home as collateral for the mortgage or other secured debt (i.e. deed of trust), and 3) the home was your primary residence or a second home that you treated as your secondary home.

If you rent out the second homed (for more than 14 days), your mortgage interest is deductible just as a business expense just any other business expense is deductible. The deduction taken against any rental income you receive would be pro-rated based on the number of rental days vs. personal use days. The portion of mortgage interest not reported as a deduction against your rental income may still be taken as an itemized deduction on your Schedule A subject to mortgage limits referenced above. 

You cannot take advantage of capital gains exclusion on the sale of a primary residence if you hold that property in an LLC, but there's no reason to hold a primary residence in an LLC anyways. LLCs are good for rental investment properties and multi-member vacation properties held for personal use.

Hope that helps!

Hi @Andrew Wilfong, this makes a lot of sense. I can definitely help. One clarification: the plan is for your parents to sell their home then use the cash to help fund the equity in the new home? Would they have an equity stake in the new home? 

Hi @Monica London, questions about LLCs is one of those topics on BP where you are liable to get a variety of answers to what seems like a single, simple question. So with the caveat that others may disagree, I generally find that forming the LLC in the same state as the property is the best way to go. If you form the LLC in one state and use that entity to hold title to property in another state, it becomes a "foreign" LLC and requires separate registered agent services and possibly additional paperwork. Long story short, forming an LLC in a state different from the location of the property increases the cost and complexity of maintaining the entity in good standing. In most states, forming an LLC is relatively inexpensive (<$200) so keeping it clean and simple to maintain is a major benefit to consider. Please don't hesitate to reach out if you'd like to look at the details for Alabama LLCs more closely. Thanks!