All Forum Posts by: Katherine Serrell

So sorry you are in this situation. Who is liable and what actions you can take depend on what state you are located in. This can vary drastically depending on what the state's laws and contracts say.

If you want a clear answer about what your legal options are, you would need to reach out to a real estate litigation attorney and ask. If you dont want to go that route just yet ... I would see if you could get grandfathered in by the city to allow for two rentals if there is evidence showing the city had allowed this in the past or for similar properties. Alternatively, I would see if you could apply for a zoning exemption with the city to allow for two rentals. You would likely need to be prepared to show the home is up to code on big-ticket items like electrical, HVAC, etc.

You can always file a complaint with the state's real estate commission and the Realtor association if the listing agent was in violation of a law. However, that could backfire also since the list agent could simply deny the fact they verbally said it was a duplex and could turn around and say that you/your client didn't do the proper due diligence either and if it was important to your client you should have verified.

Just something that came to mind... If your client's insurance company was told the house is a legal duplex and they find out that is not and/or your client's are operating a duplex illegally they might not cover you in the event of a claim so you may need to have your client's double-check their coverage. I could be totally wrong but I would think it is worth a phone call.

Great question. It would depend on what kind of loan you were refinancing into. If you refinanced out of your conventional into an investment property or a commercial loan the answer also depends.. some banks and credit unions do not lend to LLCs. However, a huge chunk of banks and credit unions do and they are not hard to find.

If you wanted to put the property in an LLC you would need to create an LLC, contact a bank or credit union that lends to LLCs and explain to them that you want to refinance into an LLC and they will take it from there.

Huge caveat is that you will need a minimum 20% equity in the property (some lenders even require 25-30%) at that point so if you used a low down payment loan to buy the duplex you would need to either hope that it appreciated to the point you have that 20% equity in it OR you would have to pay down the principal amount to get to 20% equity. 

For example: if you bought a 500k duplex with a 10% down loan that means you have 10% equity and your loan balance is $450k. So, to get to 20% equity, you would either need the property to appraise for around 560k (560,000x.80=448,000 so close to your loan balance) but if the property had not appreciated and was still worth what you paid for it (500k) you would have to pay the principal down to 400k (500x.80=400k) So you would need to come up with 50k cash (Loan balance= $400,000-$450,000 = -$50,000) to get the equity you need to be able to get an investment property loan for the LLC on the refinance.

Another two downfalls to this is that commercial loans/investment property loans have higher rates and you technically cant owner-occupy them. So, if you want to avoid higher rates, dont have enough equity yet, or dont want to move...you should refinance and leave the property in your personal name. As you can see from the 1000 other posts on here about whether or not you should put your property in an LLC posts.. an LLC is just one "layer" of protection but a good insurance policy and an commercial umbrella liability policy should do the trick.

Hope that helps!

Im a CPA but in audit/consulting not tax so take this with a grain of salt and I am not offering professional advice here but hopefully can give you some context... This is actually a complex situation if you really want to go down the rabbit hole. If you are receiving a true "gift" then neither you or your parents have to pay a gift tax. That $17,000 exclusion just means that if someone gifts an amount over that that they have to submit a form to the IRS declaring that they gifted over the amount and that amount basically counts towards the lifetime gift exclusion that is around 12 million dollars for 2022. So, if your parents give you under this amount no one pays tax on it, you just have to declare it to the IRS.

If your parents are giving you an "interest-free loan" you technically have recognize income in the form of whatever money you are saving in interest. For example: if you are given an interest-free loan for $100,000 and the market interest rates for that type of loan product is 10%... then you have to recognize income in the form of $10,000 since that is what you would have had to pay. So, if you are in a 20% tax bracket, you would pay $2000 in taxes. Now, depending on your income and after all of the wonderful tax deductions, write-offs, etc that real estate investors can leverage to 'maximize their after tax wealth' you likely will not end up paying that $2,000. However, if you do, its still cheaper than the $10,000 in interested but hopefully you get the concept. 

Your parents wouldn't be taxed on the "income" if you paid them back over time because there is no income if it is an interest-free loan. They are just getting a return of their cost-basis in the asset. So, until they earn MORE than this, they wont pay income tax on it because they didnt "earn" anything. To continue with the above example, if you ultimately paid them $100,500 back, they would pay income tax on $500 since that is what they "earned" for lending you money. 

What I would personally do is let my parents gift it to me interest-free and I pay them back. I doubt I would end up having to recognize interest income (the $10,000 from our example) and pay income tax on it (the $2,000 from our example) because I have a great, real estate savvy CPA that would figure out a way to get my income down so I ultimately wouldn't have to pay that and everyone wins.

Again, this is not my area of expertise so this is just my basic knowledge based on what I was taught and I am not giving legal or tax advice here but hopefully it gives you some thinking points. Please verify with your CPA. Even if you do your own taxes (not advisable), you can still pay a real estate savvy CPA their hourly rate for a consultation on the specific situation. 

(Just an FYI: most sophisticated CPA firms (i.e.not turbotax or H&R block) have audit risk software that basically calculates your chances of being audited based on the tax stances you take so another good reason to invest in a good CPA)

Quote from @Lynn Green:

I had a "good" CPA for five years until we had to part ways due to the lack of knowledge on real-estate tax deductions. I have heard on Bigger Pockets Pod Cast that there are no CPA's that specialize in Real-estate and that we need to know our stuff. My CPA was Charging me their time to understand the tax rules I was bringing to them. I was paying for their education. 

Any suggestions where I can look for a CPA with Real Estate Tax knowledge? I am networking as well.

Thanks,

CPA here. You absolutely can find a CPA that specializes in real estate. In my opinion, the best way to go about finding one is to network with your local REIA or local real estate investing Facebook group. Almost always if you post in one of those groups you will get a bunch of similar hits with people who have actual knowledge of what that CPA brings to the table and their rates. I’ve had good luck with that in two markets. In my opinion, your CPA should have referred out to someone else if they didn’t have the knowledge, expertise, or skill set to meet their client’s needs. If you are doing specific types of transactions (flips, BRRRs, etc) in a specific market, you could also find the person doing similar deals to yours (leverage tax deeds, property records, permits etc.) and ask them. They will be your best resource. 

To be considered for FHA, it needs to be one property not one package. "Multiple structures" on one lot with the same title/deed should still qualify for FHA. If it is two duplexes with two deeds or two separate lots, it wont qualify. The the best way to get a clear answer is to call up the bank or credit union you would be using and a couple of others and send them the listing and ask.

Im not a lawyer but I personally wouldnt put the rental under the contracting business. I would use a separate LLC. If someone in your contracting business sues you and you had the house in the LLC, they would be able to take the house. The tax benefits will likely remain the same in both scenarios. The only downside to having two llcs is the fees for the extra llc but again, I wouldnt have anything in the contracting LLC that I wasnt willing to loose due to the nature of the business and the potential for lawsuits in that arena. Having a second llc will act as an additional, very affordable insurance policy.

Quote from @Cindy Joseph:

Quote from @Katherine Serrell:

Hi Cindy! Congrats on your first deal! Here are my thoughts on your questions. 

- You cant use an S corp, C corp, or LLC for a primary residence secured by an owner-occupant mortgage because they bank can call the loan. There is something called a 'due-on-sale' clause that basically says that if the property is 'sold' to a new owner (i.e. your S corp, C corp, or LLC) they can call the loan due and you would either have to refinance or sell. Granted - this is rare, but they most certainly can. You just need to inform you insurance agency that you are renting the other side and ask them to update your policy to cover this. I would also get good commercial liability umbrella insurance policy. You can require your tenant to get renters insurance if you want to go a step further.

- The tax benefits are the same in this situation. Just because it isn't a formal LLC doesn't mean its not a 'business' since you still have business income, business expenses, etc. The tax treatment of sole proprietorship income (what you will have) and a single-member LLC income is the same because single-member LLCs are "pass through entities" so the income essentially flows through to your personal return.

- You don't need to have a corporation to have people work on the property. 

- Best way to get tenants? Depends on your market. Zillow, Apartments.com, local college facebook groups, etc is a good place to start. Biggest thing is to screen them well. Background checks are absolutely necessary. You don't need to hire a lawyer to draft a lease agreement. You can find lease templates online. Make sure they cover what your state requires. You do need to understand tenant-landlord laws in your state such as how you have to hold a security deposit, how much you can charge for a security deposit, how many days notice you have to give for certain things, etc. Many websites have quick guides to each state's laws. 

- Advice in general: There are no dumb questions (cliche, I know). Everyone feels overwhelmed when they first start off. Keep asking questions and try to be "comfortable being uncomfortable" until you get through the learning curve. The first one is the hardest. Never cheap out on insurance. Keep records of literally any money you spend on or related to the property for when tax seasons rolls around. 

Hope this helps!

 Do you recommend both landlords insurance and umbrella insurance (on top of home owners insurance)?

You should ask your insurance company what they recommend and go with the higher amount of coverage if they offer a range. Different insurance companies have different policies and some have what I would consider “hybrid” policies or ones they can add or modify to give you the coverage that you need. I definitely recommend the umbrella policy on top of whatever your insurance company recommends. Whatever questions you have, make sure you get the response in writing. I’ve had agents verbally tell me something specific was absolutely covered in the policy and after reading the policy myself it was most certainly not mentioned once. So don’t just blindly take their word for it. “Trust, but verify.”

I don’t want to make you paranoid or anything haha. Statistically speaking, these catastrophic circumstances are extraordinarily unlikely but if you can hedge the “extraordinarily unlikely” with $200/yr of extra insurance coverage you obviously should. 

Hi Cindy! Congrats on your first deal! Here are my thoughts on your questions. 

- You cant use an S corp, C corp, or LLC for a primary residence secured by an owner-occupant mortgage because they bank can call the loan. There is something called a 'due-on-sale' clause that basically says that if the property is 'sold' to a new owner (i.e. your S corp, C corp, or LLC) they can call the loan due and you would either have to refinance or sell. Granted - this is rare, but they most certainly can. You just need to inform you insurance agency that you are renting the other side and ask them to update your policy to cover this. I would also get good commercial liability umbrella insurance policy. You can require your tenant to get renters insurance if you want to go a step further.

- The tax benefits are the same in this situation. Just because it isn't a formal LLC doesn't mean its not a 'business' since you still have business income, business expenses, etc. The tax treatment of sole proprietorship income (what you will have) and a single-member LLC income is the same because single-member LLCs are "pass through entities" so the income essentially flows through to your personal return.

- You don't need to have a corporation to have people work on the property. 

- Best way to get tenants? Depends on your market. Zillow, Apartments.com, local college facebook groups, etc is a good place to start. Biggest thing is to screen them well. Background checks are absolutely necessary. You don't need to hire a lawyer to draft a lease agreement. You can find lease templates online. Make sure they cover what your state requires. You do need to understand tenant-landlord laws in your state such as how you have to hold a security deposit, how much you can charge for a security deposit, how many days notice you have to give for certain things, etc. Many websites have quick guides to each state's laws. 

- Advice in general: There are no dumb questions (cliche, I know). Everyone feels overwhelmed when they first start off. Keep asking questions and try to be "comfortable being uncomfortable" until you get through the learning curve. The first one is the hardest. Never cheap out on insurance. Keep records of literally any money you spend on or related to the property for when tax seasons rolls around. 

Hope this helps!

Hi Megan! 

It doesnt matter what state you establish your LLC in, you still have to follow the tenant-landlord laws of the state that the property is in. For example, if you have an LLC registered in Wyoming and your LLC purchases or manages a property in Nevada, the Nevada tenant-landlord laws apply. So, if you are looking to get the benefit of investing in landlord-friendly states you have to own property, not just an LLC, in that state.

I am not a lawyer and I am not offering legal advice but just based on what I have been advised and heard of others doing .. As far as LLC formation, people normally just try and find the cheapest option or go with the state that they will be purchasing the properties in for transaction ease but its not required. As you mentioned, some states are more cost-effective than others when it comes to saving a few dollars upon formation, filing your annual return, business license/tax/privilege tax, and/or when you file your annual report. Delaware is a popular state to look into for that reason.

Normally, when municipalities require a permit you just have to sign an owner's affidavit. To refresh my memory, I looked up my city's form again and they have a section on the owner's affidavit for property managers, co-hosts, etc where the owner fills out (see bold text).  That being said, if you have a good relationship with the seller, they would literally just need to sign the form. 

The persons listed below do hereby give authorization and permission to:

___________________________________________ of ___________________________________
(Name of Representative/Agent) (Name of Organization)
to submit to the City of Raleigh a request for a Short-Term Rental zoning permit at the above referenced property.