All Forum Posts by: Naseer Khan

@JR M.

Only the LLC assets would be at risk in a lawsuit against the LLC and the members of the LLC, along with their personal assets should be safe. This is assuming that the LLC and the members are following LLC guidelines by keeping personal and business assets separate and following the formalities of the LLC operating agreement/local entity law.

I suppose if you had a separate management company that collects rent, that would separate the finances from the property. Of course, you would beed to assess your cash flow situation to determine if all of the extra fees are worth the peace of mind of full liability protection. 

@Ryan Mattson

Definitely get a separate bank account for the LLC or you will open yourself to possible lawsuits where your LLC will be disregarded and will lose all of its protection. All business income/expenses should be kept separate from your personal assets.

However, if you are looking to get a fannie/freddie loan then you cannot use an LLC because banks will not loan to LLCs for conventional mortgages, they will only loan to you personally. You can ask your bank about different loan products where the owner of the property is an LLC, but you and/or your father will likely have to personally guarantee the loan.

@Ken T.

You can pass some of the cost along to the borrower as Document Preparation fees, or Legal Fees, etc.  But it is a good idea to use an attorney to draft the documents to ensure you are protected. 

Be sure you know how a Deed of Trust works.  It is not like a mortgage. You must designate a trustee (generally, a third party not affiliated with lender and borrower) who holds title as a surety for the loan.  Lenders in California use third party companies such as title companies that act as trustees and they handle the default and foreclosure process for you -  all for a fee of course.  There must be specific "power of sale" language in the Deed of trust, which allows you to conduct non judicial foreclosures. 

On the other hand, a mortgage acts more like a lien against the property and generally require a judicial foreclosure. 

@JR M. You are correct. I'm not sure how Ohio real estate closings work but you might be fine with just using an experienced realtor who gets paid by the seller's commission. Furthermore, the Nevada LLC might be overkill because it doesn't really help you. The property is located in Ohio, so if someone is going to sue you, they would most likely use Ohio courts. And you are still on the hook for the California LLC franchise tax because you are conducting business from California (see my post above). You would be better off setting up a California LLC and an Ohio LLC and make the CA LLC the owner of the Ohio LLC.

This response neither constitutes legal or tax advice nor establishes an attorney-client relationship. Inquirers must seek the advice of their own legal counsel prior to undertaking any course of action related to this inquiry.

@JR M.

Attorneys are only allowed to practice law in the states that they are licensed and the term "practice law" is generally defined in a broad manner. This means that a California licensed Attorney cannot help you setup an LLC in Nevada, even if he know all of the Nevada laws and knows exactly what to do. State bar associations will come down hard on unlicensed attorneys who give advice on its state's laws or provide any service that have a legal effect. So, its always best to go to a local attorney for local matters or use an attorney who is also licensed to practice in multiple jurisdictions, including the state you need services.

@Manuel Reyes

I have talked to some clients about using this structure, however, instead of a Nevada, LLC, I would use a California LLC as the Parent/holding company. So, the California LLC owns your NC LLC(s) -- no need for an additional LLC in the middle. Unfortunately, there isn't any clear guidance in this area from the California FTB and I haven't been able to find any specific authority that allows it or disallows it. Accordingly, based on logic, it appears that you may be able to utilize one California LLC to own/operate one or more out-of-state LLCs, and you would only need to pay one CA franchise tax fee. Like I said, this is not certain and an FTB agent may not allow it. Yet, on the same token, since there isn't any guidance from the FTB, you may be able to convince an FTB agent that your structure is within the bounds of the regulations. This is how tax attorneys utilize the tax code for their clients and then defend the position with law and facts.

This response neither constitutes legal or tax advice nor establishes an attorney-client relationship. Inquirers must seek the advice of their own legal counsel prior to undertaking any course of action related to this inquiry.

@Account Closed Generally, if you are sued, it will be in the state where the property is located or the injury occurred. A Plaintiff generally has the option to sue you in a jurisdiction where the injury occurred, where the defendant resides, or where the defendant is incorporated. Accordingly, if someone gets injured in your Michigan property that is owed by a Wyoming LLC, the injured party is likely going to sue you in Michigan because its easier for them to file a suit there. Unfortunately, the Wyoming LLC cannot help you in that situation.

@Mark Abele in the scenario you described above, you should not have to pay any capital gains tax. I'm not an accountant but one thing you may need to watch out for is depreciation recapture.  The depreciation deductions that you took (even if you didnt actually take them) will get recaptured and taxed at a rate of 25%.  So, if you took a total of $10,000 of depreciation deductions, then you may have a tax bill of $2,500.  But you may need to confirm this with a CPA. 

@Mark Abele it depends:

1) How much are the capital gains?  if you're married, you can exclude up to $500,000, single $250,000

2) Did you live in the property first, then rent it out or vice versa?  

If the taxpayer used the property as a rental or vacation home prior to using it as his or her personal residence, then the amount of gain that can be excluded will be reduced for that period of “non-qualified use” (see IRC Sec. 121(b)(5).) However, using the property as the primary residence first and then converting to a rental will not affect the exclusion.

For Example, John buys a house in June 2010 for $300,000 and uses it as a rental for 2 years. Then in June 2012 John moves into the house and uses it as his primary residence until June 2014, when he sells the house for $700,000, which gives him a gain of $400,000 ($700,000 sales price minus $300,000 basis.) Although John qualifies for the capital gain exclusion because he used the home as his primary residence for 2 of the past 5 years, 50% of that gain does not qualify for the exclusion because 2 of the 4 years of ownership were attributable to non-qualified use. Thus, John will pay capital gains tax on $200,000 of the gain and the remaining $200,000 will be excluded per IRC sec. 121.

Note: for simplicity sake, this example does not take depreciation deductions into account, which is explained below.

This is not legal advice. This is for educational purposes only. 

@Russell Brazil is correct regarding losing the Section 121 capital gain exclusion by transferring to an LLC

I do not agree with the other post that most LLCs can be pieced - it is very difficult and expensive to prove, in court, that an entity is the "alter-ego" of the individual owner. If you simply follow the guidelines of maintaining the LLC, it should provide the protection you desire.