All Forum Posts by: Todd Hoffman

Thanks!  I appreciate the detailed response and the color the story adds.

For those who provide transactional/same-day loans (including @Jesse LeBlanc and @Jay Hinrichs), do you require a loan title insurance policy, and typically what LTC (percentage of the purchase price) do you lend?

Before proceeding, consult an attorney or CPA specializing in trust and estate tax law.

1. Potential Capital Gains Avoidance or Delay:

• No gains if there's no appreciation from the initial basis (likely the value at the parents' time of death) adjusted up for any capital improvements or items allowed to increase the basis.
• You might reduce the sale price using a Minority Interest Discount and/or a Lack of Marketability Discount, accounting for reduced control and marketability.  Essentially, the discounts take into account that the beneficial interest is worth less than the corresponding portion of the value of the whole because the purchaser does not have complete control, and refinancing or liquidating can be more challenging, slower, and even impossible when beneficiaries to do not agree, or other specific rules or restrictions of the trust itself (some of part of the discount may depend on the terms of the trust itself). A professionally appraised minority value may be necessary.
• A 1031 exchange could defer capital gains for the selling sibling, provided they reinvest in qualifying real estate. Probably would require a transfer of ownership interest of the house to the sibling (or sibling's LLC or entity) before that sibling's interest is sold to the other sibling.
• Donating a portion to charity might avoid capital gains, but specifics, methods, and timing matter. 

2. Capital Gains & LLC Transfer:

• Transferring the house to an LLC, where all beneficiaries exchange their trust interests for LLC membership interests, might not trigger immediate capital gains due to the carryover basis principle. Yet, capital gains considerations could arise when a membership interest is sold later.

3. Trust Specifics:

• Trusts have unique tax brackets and can incur taxes upon asset transfers. However, changing beneficiaries' interest percentages without an asset sale might not trigger a tax for the trust, but the selling beneficiary may have tax considerations.
• Always check the trust's terms regarding the sale or transfer of beneficial interests.
• Always check the trust's terms regarding the sale or transfer of assets if considering transferring the house to an LLC.

4. State & Other Considerations:

• Be aware of state-specific taxes on trust interest transfers.
• Transferring to an LLC might bring other taxes or fees, such as transfer taxes, HOA fees, or special district charges.

5. Complications to Consider:

• Issues could arise with mortgages, encumbrances, or other trust liabilities.

6. LLC Transfer Concerns:

• If the house is a primary residence, transferring to an LLC might disqualify it from the federal capital gains tax exclusion.
• Some states might increase property taxes for non-owner occupied properties.
• Post-transfer usage restrictions or requirements might exist (e.g., new owners can't do short-term rentals, or new landlord registration is required if the municipality requires landlord registration or licensing.)

7. Other things:

• Other things I should have considered or do not know (Probably lots - Which one reason you should consult a knowledgeable legal and tax professional before acting).

I hope the above content (the "Content") is helpful. The Content is intended for educational and entertainment purposes only. I am neither an attorney nor a legal or tax expert. The Content is provided "as is". The Content should be considered flawed personal opinion without warranties. The Content may not be complete, accurate, appropriate, or applicable to specific circumstances. It is not a substitute for professional advice; before making decisions based on the Content, you should consult knowledgeable professionals about your specific circumstances. Do not rely on the Content.

@Scott DuVall, your question about avoiding the "due-on-sale" clause when transferring a rental property title to a disregarded LLC is a good one. If possible, the best approach would be to set up the LLC before purchasing the property, thus avoiding the issue altogether. However, if that's not an option, navigating this situation can be complex and nuanced.

I am not aware of any silver bullets to avoid the Due-on-sale clause. I would welcome a legal expert's advice on this.

To the extent possible, negotiate with your lender or noteholder to allow the transfer. Keep in mind that getting their written consent is crucial to avoid any future complications. Some lenders may be reluctant to allow this transfer as they prefer to have the borrowers still on the title for ease of loan resale.

If you can't secure the lender's permission, there are several factors you should consider, though this list isn't exhaustive:

· Refinance:

o What are the costs and interest rates of a new loan with the LLC as the titleholder?

o Can you refinance the loan through a line of credit or by using other assets as collateral?

o Is there a prepayment penalty on the current loan?

· Likelihood of the loan will be called due if you transfer without written consent:

o Has the loan been sold, or will it be sold in the future?

o Have the interest rates increased, or are they likely to increase? Lenders may be more inclined to call the loan due if they can re-lend the money at higher rates.

o Noteholder’s past behavior and plans. And keep in mind that the Noteholder could sell the loan, and it is hard to know what a future Noteholder may do.

o Consider the noteholder's situation. For example, banks with liquidity issues might be more likely to call the loan due.

· Other impacts of violating the loan agreements:

o Transferring the property without the lender's permission may breach your loan agreement, which could have legal consequences beyond just the acceleration of the loan.

· Evaluate your personal situation:

o Are there any upcoming life events (like selling another property with significant equity) that might make loan acceleration manageable?

o Again, prepayment penalties may play a role

· No Transfer:

o If you don’t do the transfer, what are the risks and costs, and can they be mitigated?

Remember, trying to avoid the due-on-sale clause without the lender's consent can lead to significant risks, including potential foreclosure if you're unable to repay the loan in full once it's called due.

I highly recommend researching thoroughly and/or consulting experts before acting.

I hope the above content (the “Content”) is helpful. It is intended for educational and entertainment purposes only. I am neither an attorney nor a legal or tax expert. The Content is provided “as is” and should be considered potentially flawed personal opinion without warranties and may not be complete, accurate, appropriate, or applicable to all circumstances. It is not a substitute for professional advice; before making decisions based on the Content, you should consult knowledgeable professionals about your specific circumstances. You should not rely on the Content.

There are some good points in the answers provided above. 

Personally, I wouldn't do business if you can't meet in person. Identity theft and advanced fee scams are big risks. You are prudent to be concerned.

I think a lot of smaller private lenders are virtually officing. So the principal registered address may be a virtual office suite or a home. I would still meet with them in person for the reasons described below.

Here is an excerpt from my related post on avoiding lender scams (slightly modified and with a few typo corrections. I have not found out how to link to specific posts):

1. Meet with the lender representative in person. In-person meetings mean the scammers (or agents) must be physically present, which often they would prefer to avoid or simply can’t do because they are not in the state or the USA. Additionally, scammers often want to stay far away from personal meetings where his/her picture could be taken. Real private hard money lenders usually (in my experience) want to meet the borrower and see the properties in person to understand the property/project and confirm the borrower is legitimate and likely to succeed. This also gives you a chance to speak with and get a sense of the character of the lender or their representative.
2. Be very skeptical and cautious of unsolicited email offers, action demands, or information requests, even when they come from banks or other companies you know or have a relationship with. Often the scam emails will look as though they are legitimate and from a source you know. Scammers may indicate there is a problem with an invoice, a need for updated payment information, to contact them because someone has used your account or your account has been locked out, or that they are offering free things or you something you want, like a loan.
3. Check for misspellings or slight changes in lender names and website and email addresses. Is the name singular where it should be plural? Has an extra word like ‘of’ been added? Call the phone number listed on the website of the company. Independently find the website and don’t just rely on emailed links or phone numbers.
4. DON’T make big up-front payments (“up-front” meaning paid before the loan funds are wired from the lender). We currently don’t charge any application fees, nor do we charge any other upfront fees. Any upfront fees totaling more than $200, should be a huge warning sign. Scammers may charge large application fees or after a loan has been “approved” charge some sort of “release fee” or require a deposit.
5. Verify the company is registered with the secretary of state where they represent they operate. Does the BBB has the same contact information that you have (including phone domain/website?. This is different than verifying NMLS registration, as that has its own issues discussed below. Check that the business is registered with the secretary of state (or other government agency responsible for tracking registrations of businesses in the state). Often scammers don’t register their fake company because it involves a credit card transaction that can be traced back to an individual. This is not foolproof, as a scammer could pretend to be someone else (but more effective when used with calling the company at a phone number on the website and verified as listed on the BBB or other trusted agency website).
6. Check that the Lender makes loans. This is easy. You can ask the title company you have chosen if the lender has made loans or check for public records of mortgages or deeds of trust (pay attention to subtle spelling differences or name changes). In Colorado, you can often check online with a county clerk and recorder. Keep in mind that some lenders and brokers use a different name when recording public documents. The Secretary of State (or other state authority) tracks registered tradenames(aka DBAs or aliases) associated with a registered business.
7. Check references other than those supplied by the lender. If the buyer or seller chose the title company, you can ask the title company if they have worked with the lender before and if the contact information matches. If you ask the lender, scammers could provide phone or email information to someone they are working with to scam you. If you don't know anyone personally, you can often find borrowers listed in the recorded deeds of trusts or mortgage documents and contact them. Often an LLC will be the borrower, but the person signing for the borrower will be a member of BiggerPockets.com or LinkedIn.com, etc. Contacting borrowers has other benefits as well. You can learn how the lender treated the borrowers, etc.
8. Verify the Lender’s address. If the Lender uses a virtual office, you can verify who holds the virtual office with the virtual office company and check the principal office address listed with the state is connected with the person or company you are speaking with.
9. Lock/Freeze your credit to lower the risk of someone opening accounts in your name (FTC info on credit freezes https://www.consumer.ftc.gov/articles/0497-credit-freeze-faqs). This means when you do want to get credit, you may need to temporarily unlock your credit.

The above steps don’t provide guarantees and are not comprehensive or exhaustive, but collectively they can substantially lessen risk.

---End of Excerpt

I hope the above content (the “Content”) is helpful. It is intended for educational and entertainment purposes only. I am neither an attorney nor a legal or tax expert. The Content is provided “as is” and should be considered potentially flawed personal opinion without warranties and may not be complete, accurate, appropriate, or applicable to all circumstances. It is not a substitute for professional advice; before making decisions based on the Content, you should consult knowledgeable professionals about your specific circumstances. You should not rely on the Content.

There is some good advice in the answers provided above. Personally, I wouldn't do business if you can't meet in person. Identity theft and advanced fee scams are big risks. You are prudent to be concerned.

Here is an excerpt from an older related post on avoiding lender scams (slightly modified and with a few typo corrections. I don't know how to link to the older post. I will look into that):

1. Meet with the lender representative in person. In-person meetings mean the scammers (or agents) must be physically present, which often they would prefer to avoid or simply can’t do because they are not in the state or the USA. Additionally, scammers often want to stay far away from personal meetings where his/her picture could be taken. Real private hard money lenders usually (in my experience) want to meet the borrower and see the properties in person to understand the property/project and confirm the borrower is legitimate and likely to succeed. This also gives you a chance to speak with and get a sense of the character of the lender or their representative.
2. Be very skeptical and cautious of unsolicited email offers, action demands, or information requests, even when they come from banks or other companies you know or have a relationship with. Often the scam emails will look as though they are legitimate and from a source you know. Scammers may indicate there is a problem with an invoice, a need for updated payment information, to contact them because someone has used your account or your account has been locked out, or that they are offering free things or you something you want, like a loan.
3. Check for misspellings or slight changes in lender names and website and email addresses. Is the name singular where it should be plural? Has an extra word like ‘of’ been added? Call the phone number listed on the website of the company. Independently find the website and don’t just rely on emailed links or phone numbers.
4. DON’T make big up-front payments (“up-front” meaning paid before the loan funds are wired from the lender). We currently don’t charge any application fees, nor do we charge any other upfront fees. Any upfront fees totaling more than $200, should be a huge warning sign. Scammers may charge large application fees or after a loan has been “approved” charge some sort of “release fee” or require a deposit. 
5. Verify the company is registered with the secretary of state where they represent they operate. Does the BBB has the same contact information that you have (including phone domain/website?. This is different than verifying NMLS registration, as that has its own issues discussed below. Check that the business is registered with the secretary of state (or other government agency responsible for tracking registrations of businesses in the state). Often scammers don’t register their fake company because it involves a credit card transaction that can be traced back to an individual. This is not foolproof, as a scammer could pretend to be someone else (but more effective when used with calling the company at a phone number on the website and verified as listed on the BBB or other trusted agency website).
6. Check that the Lender makes loans. This is easy. You can ask the title company you have chosen if the lender has made loans or check for public records of mortgages or deeds of trust (pay attention to subtle spelling differences or name changes). In Colorado, you can often check online with a county clerk and recorder. Keep in mind that some lenders and brokers use a different name when recording public documents. The Secretary of State (or other state authority) tracks registered tradenames(aka DBAs or aliases) associated with a registered business.
7. Check references other than those supplied by the lender. If the buyer or seller chose the title company, you can ask the title company if they have worked with the lender before and if the contact information matches. If you ask the lender, scammers could provide phone or email information to someone they are working with to scam you. If you don't know anyone personally, you can often find borrowers listed in the recorded deeds of trusts or mortgage documents and contact them. Often an LLC will be the borrower, but the person signing for the borrower will be a member of BiggerPockets.com or LinkedIn.com, etc. Contacting borrowers has other benefits as well. You can learn how the lender treated the borrowers, etc.
8. Verify the Lender’s address. If the Lender uses a virtual office, you can verify who holds the virtual office with the virtual office company and check the principal office address listed with the state is connected with the person or company you are speaking with.
9. Lock/Freeze your credit to lower the risk of someone opening accounts in your name (FTC info on credit freezes https://www.consumer.ftc.gov/articles/0497-credit-freeze-faqs). This means when you do want to get credit, you may need to temporarily unlock your credit.

The above steps don’t provide guarantees and are not comprehensive or exhaustive, but collectively they can substantially lessen risk.

---End of Excerpt

I hope the above content (the “Content”) is helpful. It is intended for educational and entertainment purposes only. I am neither an attorney nor a legal or tax expert. The Content is provided “as is” and should be considered potentially flawed personal opinion without warranties and may not be complete, accurate, appropriate, or applicable to all circumstances. It is not a substitute for professional advice; before making decisions based on the Content, you should consult knowledgeable professionals about your specific circumstances. You should not rely on the Content.

Glad you found it helpful. There were a few assumptions I made that were not stated in that post.

I assumed that you and your spouse own the property together and you file income taxes jointly, and that the LLC is a disregarded entity (essentially, the IRS sees a "disregarded entity" as not separate from its owner(s) for tax purposes, even though it might be legally separate from the owner(s). On an IRS 1040 Tax return, a disregarded entity income filing is usually in Schedule C as opposed to a separate income tax filing for the business).

If you (and your spouse) are transferring ownership to an LLC, and the LLC is not a disregarded entity for you and your spouse, or there are other ownership differences, there may be additional considerations. There could be gifting tax considerations and/or capital gains considerations, and potentially other tax considerations.

More reasons to research thoroughly and/or consult experts before acting.

Note: Even if an LLC is disregarded for federal income tax purposes and you don't file separate IRS income tax filings for the LLC (i.e., in your personal IRS filing Schedule C), the LLC may still be required to file separate state tax returns, employment tax returns, or information returns like Form 1099, depending on the circumstances.

I hope the above content (the “Content”) is helpful. It is intended for educational and entertainment purposes only. I am neither an attorney nor a legal or tax expert. The Content is provided “as is” and should be considered potentially flawed personal opinion without warranties and may not be complete, accurate, appropriate, or applicable to all circumstances. It is not a substitute for professional advice; before making decisions based on the Content, you should consult knowledgeable professionals about your specific circumstances. You should not rely on the Content.

Congratulations!

Here is a list of items to consider when transferring a title of rental property from individuals to an LLC (and I would advise consulting a good attorney with local knowledge, especially your first time if you are not a legal expert):

• Title Insurance: Transferring the property may void your title insurance. Review the title insurance policy and contact your title insurance company about the planned transfer. The insurance company may be able to endorse the policy to ensure continued coverage.
• Forming the LLC and bank accounts (From your post, I think you did this one): Establish an LLC. This process varies by state but typically involves choosing a name, filing articles of organization, creating an operating agreement, and paying filing fees. You will also likely need to establish a bank account to ensure you can conduct business through the LLC without piercing the veil (and taking on personal liability).
• Prepare a Deed to Transfer Property: Depending on the state (I think Ohio allows both), you may use a quitclaim deed or a warranty deed. Quitclaim deeds are commonly used when the property is transferred without a traditional sale, like to an LLC.
• Filing the Deed: Once the deed is prepared and executed, you need to file it with the appropriate county recorder's office. A transfer tax might be involved, although the amount varies widely by locality.
• Compliance with State Laws: Different states have different rules and requirements regarding property transfers, so it's important to research or consult a legal professional knowledgeable about the law affecting your property.
• Local Rental Rule Considerations: Some towns and cities may have laws regarding rental licensing, registration, or permission. Some may require landlord licenses (or registration). Some, and more common for short-term rentals, may have restrictions making it hard or impossible to re-establish permission after a transfer. Again research and consult before acting.
• Tax Considerations: Transferring property can trigger a "reassessment" of its value for property tax purposes.
• Avoiding the 'Due-on-sale' Clause: Most mortgages have a due-on-sale clause, which allows the lender to demand full repayment upon the transfer of property. Transferring property to an LLC might trigger this clause (consult your loan documents and possibly your lender).
• Hazard/Liability Insurance: You will need to update or change your property insurance policy. Just to remind you, a regular homeowner's policy generally does not cover rental properties owned. While transferring property to an LLC can offer liability protection, it is not a substitute for good insurance. Obtain good liability insurance (some liability coverage can often be included with the landlord or commercial policy).
• Updating Lease Agreements: If you have tenants in the property, you'll need to update the lease agreements to reflect the new ownership by the LLC.
• Planning: Assess the overall costs and plan the order to do the items.

Finally, while this list covers several points, it is not exhaustive, and the complexity of the real estate and tax laws means there may be other issues and considerations. Thus, consulting with a real estate attorney and possibly a tax advisor (depending on the attorney’s depth and scope of knowledge) is recommended to understand all potential legal and financial implications before making such a transfer.

I hope the above content (the “Content”) is helpful. It is intended for educational and entertainment purposes only. I am neither an attorney nor a legal or tax expert. The Content is provided “as is” and should be considered potentially flawed personal opinion without warranties and may not be complete, accurate, appropriate, or applicable to all circumstances. It is not a substitute for professional advice; before making decisions based on the Content, you should consult knowledgeable professionals about your specific circumstances. You should not rely on the Content.

Hi Jacob,

It depends on your other opportunities and other factors. Hopefully, the examples below add some color so “it depends” has some value. Assuming your property is an investment property and not your primary residence…

A 1031 exchange (like Ms. Zhao suggested) might be a great way to postpone, reduce, or eliminate taxes (if you have good real estate purchase opportunities available).

A cash-out refi might also be a good option if you want to keep the property. Perhaps you have good real estate purchase opportunities available that do not require all the capital. A cash-out refi may also make sense if you have credit card debt or other high-interest debt and could pay 3% using a cash-out refi. Or perhaps you want to lock in low rates and use the capital for some other risk-reward attractive investment like specific securities, bonds, loans, or preferred securities. As an example, perhaps there is a cumulative preferred stock from a bank you believe to be low risk and it pays 5% with an expiration date in a year (trading at par). If you could borrow money at 3% and earn 5%, 50K loan could you earn $1000 after paying the interest (assuming no points or upfront costs in the loan origination and no prepayment penalties).

However, if you don’t have other “good investment opportunities”, a cash-out loan may cost you that 3% but in a bank account, you may only earn 0.5% interest or less. Hence you will probably lose money if you take out the loan and just sock it away in a bank account.

Selling the property may make sense even if you don’t have a high return investment opportunity. Is the market significantly overvalued? Will operating income tank (expected changes to the local market, expected tenant loss and vacancy, expected changes in taxes or assessments, etc.)? Do you have an outstanding business opportunity and can sell the property to realize that opportunity?

This is not comprehensive, but hopefully illustrative.

The quick answer may be to look at your "opportunity costs". But the problem in providing you a concise but actionable answer is every situation is different and the specifics matter… Other opportunities? Liquidity needed? Liquidity, asset, debt, and income picture? Risk tolerance? Diversification? Personal time to devote? Your expertise? Etc.

The above is opinion, not expert advice. It may be flawed and is for educational and entertainment purposes only. You should not rely on the information, and it may not be accurate, comprehensive, suitable, sufficient, or appropriate.

@Jason Richards. Thanks, and thanks for the clarification.  States definitely have different laws and regulations for loans and licensing. 

If a lender is required to have a license and does not, that is a huge red flag. On the other hand, verifying the NMLS ID exists won't necessarily protect you and borrowers may miss out on many great private lenders (not required to have NMLS licenses) that may provide lower rates and fees. 

If the lender or broker provides an NMLS ID or is required by state law to have an NMLS license, verify the information on the NMLS Consumer Access site. Either way, I would verify the website and contact info against other well-respected websites like the BBB (and verify you can contact that person through the information provided on those websites). Some of the other items like in-person meetings with lender/broker representative, checking references not provided by the lender/broker, do not make big up-front payments, etc. are still steps I would take. No guarantees, but risks can be reduced.