All Forum Posts by: Clint Coons

@Hanah Frickers Best to look at the county exemptions to determine if the tax is unavoidable. We prepare deeds in 48 states, and unfortunately, there is not a general rule that covers all transfers. I gave you the 50% number, so you know that transferring the beneficial interest is the same as transferring the underlying real estate. Some may tell you that no one will know if you assign a trust interest or an LLC interest to a third party, and this is correct. However, when you later sell or refinance the property, your title company, and the county recorder/assessor will most likely catch the change.

@Scott Mac I do not use Nevada because the only way to obtain anonymity is through a nominee manager or office/director with a corporation, and the costs are high. When we first started, Nevada was our #1 choice, but this happened - Nevada increased their fees to generate state revenue then the banks quit working with us. We used to have banking relationships with Chase, BofA, and Wells. We would let them know we set up an entity for a client, and the client needed a bank account. The bank opens the account and sends the signature card to a local branch where the client resides. The banks stopped offering this service two years ago. Now, if you want anonymity in Nevada with a nominee, you can not open a bank account for the entity because the bank will look at the secretary of state website and notice you, as the entity owner, is not listed as the manager of the LLC. Thus, the banking hassle and costs drove us out of Nevada.

@Soh Tanaka I get it - great point. Whenever we structure someone, we give them a good/better/best scenario and let them decide on their risk tolerance. Several years ago, at one of my tax and asset protection workshops for real estate investors, a person called me out for telling the class to group properties when I use one LLC per property. I think her comment was, "why would you tell us to do something you are not doing for yourself - are our assets not as valuable as yours?".  It caught me flat-footed.  I now teach the class with one property per LLC but tell them they can group based on their risk tolerance level.  Also, I tend to focus less on equity and more on the cash flow aspect of the real estate.  For example, if you have seven properties in one LLC with a total of 300k equity but each property (after expenses taxes and debt) generates $300 per month, the total risk of loss is the $2,100 income.  When the client has several LLCs, I typically look at using a management entity to handle the accounting and collections, etc. to simplify life.

@Bernard Reisz Yes, several states offer anonymity and depending on the strategy, I will use them, but for my holding LLC, I prefer WY or DE. Both of these states have strong charging order protections and business courts. The business court angle is not understood by most until they are in litigation, and their attorney is teaching the judge the difference between an LLC and a Corporation.

@Soh Tanaka I typically structure each property in a separate LLC unless I am dealing with a portfolio lender, and the lender requires grouping. The LLC is set up in the state where the real estate is located, and a WY LLC or possible DE holds all of the LLCs. I see investors who like to structure their out of state property with WY LLCs only to discover it creates problems down the road when evicting tenants as I discussed above.

The first question you should address is where the properties are located. Using a WY LLC to hold out of state real estate will not protect you and could create more issues. For example, if your real estate was located in IL and you use a WY LLC to hold the title, then you could be precluded from bringing an unlawful detainer action to evict a tenant because your LLC is not registered in IL. Solution - register your WY LLC in IL, but if you do that, then you give up all of the benefits of WY - unfortunately, there are a lot of real estate investors who make this mistake. Ultimately you end up paying WY and IL annual filing fees, and you have none of the WY benefits you were seeking. Another point is the charging order protection a few commentators have raised only applies to claims against the member of an LLC. If you are looking for protection from your real estate (you should), then take each property and place it in an SMLLC owned 100% by your corporation. The LLCs will be set up as disregarded entities. Depending on the state where your real estate is located, you might consider a series LLC. This will protect each of the properties from each other and your corporation. Now to protect the shares of your corporation from someone obtaining a judgment against you individually and taking your shares, set up a WY LLC to hold the corporate shares. You will be the member and manager of this LLC, and it could be set up as a disregarded entity for tax purposes.

A few points to consider when moving ahead with this transaciton. If the 2 of you owned the property in 2019 and it shows up on your 1040, then you will need to account for what happened to the property on your tax return. ( Possible gift - you just want to avoid disguised sale treatment with the swap.) The other issue with your proposed swap is transfer taxes. Check with the county to see if the transfer of 50% ownership will not create a transfer tax liability. I know you are thinking about transferring the ownership interests in the LLC, but this still counts as an indirect property transfer. Also, not knowing any of the details for the swap, George made some excellent points about the motivations that should be evaluated.

Marisa,

Here are some examples that insurance will typically not cover:

• Breach of contract on PSA e.g., seller sues for damages for your failure to close and property value has declined
• Environmental claims such as "Toxic mold"
• Loan defaults because you walk away from a bad property
  Tenants hurt while working on the property for reduced rent
  Wrongful eviction or discrimination
  Property vacant for more than 30 days while doing rehab and someone is injured
• Animal damage to property
• Zero bite rule because of "attack" dog
  

These are just some of the situations I have dealt with regarding clients who were not covered.

The benefit of the WY LLC is it allows for the setup of your state-specific LLCs with anonymity. Yes, WY does provide strong charging order protections versus a state like Florida that does not offer any protections for single-member LLCs. I would not undervalue the benefit of privacy. Many lawsuits are just shakedowns designed to intimidate deep pockets defendants into paying to make the case go away. I know some people argue against structuring in favor of insurance, but many real estate related lawsuits are not covered by insurance, so you are left to defend yourself. Keeping your ownership of business entities off the secretary of state's database helps discourage the shakedown lawsuit. I have structured many people with this type of setup, and it served them well when the lawsuit hit. The approach I take is my business is my business, and the public does not have any interest in knowing how many entities or properties I own. Second, you mention that you must use a nominee manager that steps in and out on an annual basis. This is not required for WY or DE, only Nevada. Wyoming does not ask for either the members or the manager's information on the initial or annual filing. My firm establishes 1000 or more WY LLCs every year, so I am well versed in their setup. A few last points to consider:

Anonymity is not appropriate in all circumstances, I.e., I would not use it if you are running an active business

Anonymity is just a smokescreen; if a creditor sues, wins, obtains a judgment and drags you into a debtor examine, you will lose the smokescreen which is why you need the LLCs

Once an entity is set up with your name (manager or member), then you can not unring the bell which is why if you want the anonymity you should set up the WY LLC before you create any other LLCs

Eamon,

I notice you have been very active on BP and have provided a lot of solid advice for BP members. I used to blog and post for BP many years ago when Josh first started BP. After a year, I pulled back because individual members like to armchair quarterback and snipe comments. Not sure of the motivations, but I assumed it was an attempt to elevate their standing. I have been in practice for 20 years, and with my partner, we have grown our firm to over 200 employees in 4 states. Part of this success has been in large part to our willingness to work outside of the box by taking the approach you “can do” rather than you “can’t do.” I have employed many CPAs over the years, and what always struck me as odd was how some were quick to shoot down strategies or ideas without any case law or rulings to back up their position. I like to remind these individuals that regs are just interpretations of the code, and unless the code states in black and white you can’t do something, then we should approach it with an open mind.

I am sure you have a successful practice and provide great service. Your responses containing remarks such as “increasing liability insurance” or “doing more harm than good” are just petty. You know as well as I do tax planning can be a creative process. In my original post, I stated there are multiple items to consider and did not advise for or against any particular strategy. Given my years of practice and the number of clients and returns we complete each year, I am very comfortable with the positions we take, and I wish you continued success.