All Forum Posts by: Lyn Green

In reading my 1993 fixed/adjustable mortgage note (5/1) I have the standard paragraph 11 "Uniform Secured Note" statement that can trigger a "due on sale" clause. It reads "If all or any part of the property or any interest in the property is sold or transferred without lenders prior written consent lender may require immediate payment in full of all sums secured by this investment".....and so on.

HOWEVER I have an "Adjustable Rate Rider" on my mortgage which I believe invalidates this clause. Is that possible, I thought most mortgages had this clause? The Rider reads: "This form applies only if form 3522 1/01 are used" (it was). "UNIFORM SECURED NOTE paragraph 11 is deleted in its entirety"

Can anyone share if they've seen this kind of clause invalidating the dreaded "due on sale" before? I will have a pro review my mortgage as I'm looking to put this property into an LLC, but I'm looking for a broad stroke answer first. Many thanks!

It is highly doubtful that the due on sale clause is invalid in your mortgage. This clause protects the mortgage company so they have the option to call the loan when you sell the property. Newer mortgages allow properties to be transferred to LLC if the mortgagee remains the majority owner. Odds are good if you keep paying the mortgage, nothing will happen. Worst case, you will likely be required to transfer it back out of the LLC. Personally I would not even bother transferring it into the LLC, because it will likely provide little protection. Since the mortgage is still in your name, it could be used to pierce the corporate veil. Also based on the age of the property, odds are good you have significant equity in the property. That means in the case of litigation, the property could be taken. Another good strategy is just having high limits of liability insurance on the property. Also be careful if you transfer into an LLC to make sure the insurance names you and the LLC as covered parties. Talk to your insurance agent before making the change.

@Joe Splitrock Thanks for your input! Transferring my property back out of the LLC is a better solution if I get hit with a 30-day notice than immediate payment in full. Is this something the servicer would normally let you do? (I realize they're not in the real estate business, so it makes sense.).

Regarding the LLC, I do already have a high umbrella policy, but are there benefits to having an LLC on my tax return versus just taking normal real estate deductions and depreciation? I'm trying to minimize taxes and more specifically keep my AGI as low as possible for other reasons. Thanks for any insight.

I can't speak for your specific situation, but I do know investors who have been notified by the bank and they were able to transfer it back. It is better not to take the risk in my opinion. There is no tax benefit to the LLC because for the purposes of taxes it is a pass through entity, which means tax treatment is the same as if you operated as a sole proprietor (just owned it directly). An LLC is used for asset protection, to isolate from your overall portfolio for liability. The theory is that any litigation is limited to the assets in the LLC. In this case that would be the equity in the property. Make sure your umbrella policy would apply if the property was in an LLC. You need to have the LLC and yourself named on the policy, which some policies will not allow.

@Joe Splitrock Thanks for your input. I spoke to my insurance co. and you are right, I cannot name the LLC on my Umbrella Policy. Further I can't get the Liability on my base policy to even come close to what the umbrella offers. Between that and the potential "due on sale" with the mortgage I think I'm going to skip the LLC and just leave the property in my name. I am concerned about the large equity I have in the property, but I don't think there's anything else I can do to protect it. Thanks for taking the time to respond!

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Originally posted by @Jon Reed:

So... I am not tax professional but an LLC doesn't give any real tax advantage, it is just there for liability protection. You can take the same expenses for the property personally as you would if it was in an LLC.

Now, S-Corps are a whole different ball game and you should talk with a trusted tax professional and accounting professional about your personal cost/benefits to using an LLC vs and S-Corp.

@Jon Reed That's helpful, thanks. I have an S-Corp but was told that LLC's are standard in RE and what is usually used.I believe health insurance premiums can be deducted from an S-Corp, but not sure about an LLC? This is an important factor to me.

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Originally posted by @Joe Splitrock:

Originally posted by @Lyn Green:

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Originally posted by @Charles Situ:

The pros to an LLC is protection of personal assets outside of the LLC. But if you want to protect your personal assets and not do an LLC, you can obtain umbrella insurance.

The cons are higher financing cost compared to conventional. LLC loans are considered commercial and have rates that are higher, generally fixed for a few years & then float, and have shorter amortization period (max 20 years). Many believe that LLC have more tax benefits since it is easier to write off expenses. But I find this to not be true.

@Charles Situ what are some examples of tax benefits that some feel are easier to "write off" with an LLC?

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I am converting my primary residence to an investment property and understand the benefits of putting it in an LLC from an asset protection standpoint. I do already have a large umbrella policy. I'm interested in understanding how investor DEDUCTIONS may be handled differently on my tax return with and without an LLC? I believe I can deduct Mortgage interest, taxes, HOA fees, maintenance etc. plus depreciation, (which I don't have a handle on yet).

My goal is to minimize taxes but more importantly KEEP MY AGI LOW as possible (for non-real estate reasons). Can anyone shed light on how running the numbers through a "business" like an LLC or S-Corp will change my tax return? For example I heard that healthcare might be a deductible expense for a sole proprietor/president of a business. Thanks for any insight!

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All Forum Posts by: Lyn Green

Lyn Green has started 2 posts and replied 7 times.

Post: Does my Rider delete my "due on sale" clause"?

Post: Deductions for an investment with and without LLC?

Post: Does my Rider delete my "due on sale" clause"?

Post: Investing in real estate with an LLC or without one?

Post: Investing in real estate with an LLC or without one?

Post: Does my Rider delete my "due on sale" clause"?

Post: Deductions for an investment with and without LLC?