All Forum Posts by: Luis Alvarez

Transferring a rental property into LLC does limit your liability, but keyword there is limit.  There is nothing that exists that will completely insulate your rental property from complete liability, because the minute it is rented, you are exposing yourself to liability.

@Nicholas Sorace Let's assume you transfer the property into the LLC and you are the sole member/manager. If some cause of action were to arise, the exposed party to litigation would be the legal title owner (in this case the LLC) and any savvy litigation attorney would also name the principal or managing members (in this case, you) in the lawsuit. Now I've seen other threads on the forums claiming "why put it in an LLC if you're going to be sued anyways?!"...the reason any and all parties that could be named in a lawsuit are named from the beginning is because in the discovery process of litigation, it may be uncovered that you (personally) are liable (through piercing your corporate veil or other deliberate acts) and that suing attorney can have additional recourses (EG your personal assets) to go after. If they don't name all individuals in the beginning of the lawsuit and sufficient time passes, they cannot later add defendants to the suit. This is typically the civil procedure you'll see, but it can vary state to state.

An LLC acts as a kevlar dome over your rental property. It protects it from outside liability (let's say you drive recklessly and kill someone, and your personal car insurance gets exhausted, the suing parties cannot come after the rental property because it is not personally owned by you).  An LLC also insulates the inside liability and contains it to just the assets held within that LLC (the rental property in this case).  

The presumption is that legal entities are excellent tools, as long as you follow the corporate maintenance and corporate formalities.  This means having separate bank account, not commingling funds, have an Operating Agreement, have simple occasional "minutes" reflecting actions of the entity, etc. etc.  Some may tell you "that's a lot of work" and "why do all that?"...the answer is because this is what professionals do and it's the price of admission to really establish your real estate business properly from the outset.

Having a lien, loan, etc. on the property does not indicate personal liability exposure to real property because being the borrower on a loan does not equate to holding legal title on the underlying property.  Although, obviously, often it is true that the borrower is also the legal title holder...but they are not necessarily interconnected.

Hi @Nick Snow

It seems like $500 LLC franchise fee is a far better option than setting up a trust for each property (which would surely cost more than that) and then prepping returns for that trust. Additionally, you typically would not want rental properties directly owned in a trust (but that's a whole conversation).

I just messaged you a sample flow chart.

Hi @Joan Saylor

A very good foundational question you're asking...and at the right time...before anything major happens!

Not to cop out with my lawyer response, but "it depends".  Do you anticipate all future acquisitions will be in TX? Have you spoken to a CPA about your current tax situation and future tax situation (may) look like?  Thinking of what structure you may need in the future can help determine some of the moves to make now, but fortunately, there's a lot of flexibility with structuring things, so not everything needs to be figured out now.

@Nicholas Sorace

I may be biased, but $260/hour for an attorney is a steal...even for Ohio.  Second, you didn't mention how long they estimated it would take.  

They should be drawing up a Grant Deed (not a Quitclaim Deed) so that all of the covenants are transferred with the title. Secondly. I presume the county you're in has additional change in ownership forms which should be filed. Again, it may not take them that long, but unless you or someone you know is experienced in drafting legal documents and transferring title, it's called paying the price of admission. Can you find forms on Google? Sure, but that's something you've got to live with. And it may not come back to bite you, but just something to be aware of. 

Next, the bigger question is: Is that LLC already set up? Properly? With an Operating Agreement, separate bank account, etc.?

Contrary to what you may hear, I do believe that you should have properties in LLCs, for reasons I won't get into here, but let's say I sleep well at night having full first-hand knowledge of litigation procedures and knowing that if my real estate endeavors fail, it won't be due to collapse from liability.

Messaged you in your other thread

@Felix Contreras ***Typically*** as long as the transfer falls under one of several legal exemptions, the due on sale clause does not kick in.  I have been trying to relay to folks that there are codified exemptions to the due on sale clause, unfortunately, many people, even attorneys, don't know of these statutes. But as we say in the legal industry: "it depends".

Hi @Felix Contreras

Are the properties located in NV like yourself? I can set you up with someone.

Hi @Heather Johnston, fellow J.D. I presume?? 🙂

What hasn't been mentioned or clarified is that the real question should be was your CPA referring to an LLC treated as an S-Corp (solely for tax purposes) or a traditionally set up Corporation (and then distinguished as an S-Corp). Yes, an LLC can be treated as an S-Corp for tax purposes, while still have the flexibility of allowing much easier transfers and assignments of interests versus a traditional corporation which is owned by stock shares (and gets complex, if you remember Business Associations from your Bar Exam)

The pros/cons list of electing to have an LLc treated as an S-Corp is thorough, but basically, there's a certain "break-even" point where it makes sense to have the S-Corp treatment because the tax advantages outweigh the extra protocols that come with an S-Corp. There are at least 10 additional tax advantages that I utilize for my holding LLC (treated as an S-Corp) which are not available to LLCs treated as either disregarded entities or partnerships for tax purposes). And while some have touched on it on here, you typically would not want to have the direct title of real property in an LLC treated as an S-Corp. However, an LLC (treated as an S-Corp) can certainly hold interests of underlying LLCs that in turn hold the direct interests of real property.

Financing can be difficult when property is held in an LLC, but a simple Grant Deed out of the LLC and then back to it (post financing) would be an easy work around. And no, the due on sale clause does not apply to such transfers. There is codified and case law exempting a majority of the transfer scenarios which most investors out there are worried about.

Correct, in essence what you're doing with the Unanimous Consent in Lieu of Annual Minutes is you're just signing a list of "notes" from yourself to yourself. You sign/date at the bottom. And done.  These are usually one pagers.  But having it at least typed up and printed provides the appearance that you are up keeping with corporate formalities. These take us minimal time to put together.

@Paul Vail

No specific need to execute a loan to yourself, since you are a member of the LLC, (when you are sending funds from your personal account to the LLC account) you are just making a capital contribution to the LLC. Indeed, you should make sure that the capital contributions are sufficient in size ($2,000, $5,000, etc.) rather than small contributions at a time (as transactions come up) so that you are following the proper corporate maintenance of "proper capitalization".

However, if you did want to execute a Promissory Note to or from the LLC (for other reasons) that can be easily put together and nothing too official needs to be done with that. I can always provide more details around that.