All Forum Posts by: Natalie Kolodij

Quote from @Kevin Lee:

Thank you, Natalie! If I could just ask one more question, i have a separate account with no co mingling of funds. Is it advisable to have an account for each property? Or could I 3 properties flow into one account and pay all expenses from there. 

How may properties are held in each LLC is a decision with yourself and the attorney. But each LLC should have it's own bank account.

Who owns the LLC?

I'm not an attorney but to me this offers no benefits. The LLC doesn't actually own the asset and most real estate lawsuits involve the actual property, so I'm unsure that it's providing you protection. 

A key point of the LLC offering protection is the separation - so if a name/asset is in your name but the bills/loan re paid from an LLC we don't have that separation. It is by default intermixing. 

Also the expenses should be reported to the business activity (the property) they legally are generated from; not necessarily the entity they are paid through. 

But your entity doesn't own that rental property; so reporting it on a partnership tax return can potentially create issues as well. 

Quote from @Kevin Lee:

Glad to see there are some subject matter experts here! Not to hijack the thread, but what is the benefit of having an LLC? Would having a highly insured property (1,000,000+ liablity) plus not being a negligent or slum landlord be sufficient and not require the use of an LLC?

 No benefit tax-wise. 

It potentially offers legal protection. There is more beyond merely setting it up though involving the operating agreement, separate accounts and books and no co-mingling and many people don't keep that piece maintained too well. 

So actual benefit is hard to nail down until it's actually tested/required to provide protection in the event of a lawsuit. 

It's recommended to discuss with an attorney knowledgeable in your state laws to determine the benefit and best structure for your situation. 

Quote from @Havital Miltz:

Normally you would set the LLC in the state where the property is.

You have no tax benefits for setting up an LLC, it is more a protection from lawsuits and going after your personal assets, however not a guarantee....

As a husband and wife you do not need to set up a partnership - IRS has special considerations for married couples for self employment, you could also apply that for a rental...

Hope that helps

A joint venture is available to any 2 people co-owning real estate for investment purpose as tenant in common under Proc. 2002-22 (unrelated to marriage) but it can't be owned in an LLC together.

A Qualified Joint Venture (§761(f)(2) )allows two spouses operating a business together to not file a partnership return; however the business can't be held as a state entity (§301.7701-2) like an LLC and it also requires material participation by each spouse under §469(h) which can be hard with a SFH.

If the spouses co-own an LLC together the only option would be if they married couple resided in a community property state allowing them to disregard the entity under Rev. Proc. 2002-69.

Quote from @Daniel Osman:

@Stacy Tring

@Natalie Kolodij is correct about the step transaction doctrine. The IRS could apply this doctrine if it appears that the series of transactions are structured primarily to achieve a specific tax outcome, such as avoiding taxes.

Regarding the 1031 exchange, while in-laws are not considered related parties, the transaction could still be scrutinized due to the complexity and nature of the other transactions involved. Selling a primary residence and then buying it back as part of a 1031 exchange could raise red flags with the IRS.

Your parents have a valuable opportunity to defer a significant amount of taxes by utilizing the $500,000 exclusion on their primary residence. They can then proceed with a 1031 exchange for their rental properties.

I understand their concern about the 180-day timeline. However, over 90% of our exchange clients successfully complete their exchanges. With proactive planning, they should be able to close on replacement properties within the 180-day period. If they encounter difficulties, they can consider Delaware Statutory Trusts (DSTs) as a backup option. DSTs can act as parking arrangements, providing more time, and they can later do another 1031 exchange out of the DST. You'd still want to evaluate the DST as an investment option of course.

Additionally, your parents might consider a reverse exchange, where they purchase the replacement property first and then sell the relinquished property. This approach gives them 180 days to sell, rather than to buy, which can alleviate some timing pressures.

Based on OP's post it sounds like what they want is: 

1. To keep their primary home 
2. To sell their rentals but not have to buy new rentals 

3. Don't want to pay tax on selling the rentals 

I unfortunately don't think they actually want to utilize the 121 to sell their existing primary and then potentially buy another one-it sounds like the goal is to ultimately continue owing that initial home which I think makes this whole plan 5x more likely to be torn apart under audit because they're trying to end up with the same property they started with. 

Quote from @Jay Jones:

Quote from @Natalie Kolodij:

Quote from @Jay Jones:

I want to do the LLC to protect my personal assets in case of a lawsuit from a tenant. It is my understanding that I could form the LLC in my state and apply for a certificate to operate in the state where the rental is. However, I have contacted the Secretary of State office and it states on their website that there it is a one time filing/fee to form an LLC there.

You will typically want the LLC setup where the asset is located.

Outside of having the LLC you'll need separate book & bank account for the LLC to operate it separately. And ensure to not intermix the business and personal between the two. 

And also you'll want to be cautious with adding 2 people to the LLC. There are a lot of accidental partnerships created.

Would the accidental partnership apply even to my wife?

 Yes. 

Unless you are based in a community property state. 

Quote from @Jay Jones:

I want to do the LLC to protect my personal assets in case of a lawsuit from a tenant. It is my understanding that I could form the LLC in my state and apply for a certificate to operate in the state where the rental is. However, I have contacted the Secretary of State office and it states on their website that there it is a one time filing/fee to form an LLC there.

You will typically want the LLC setup where the asset is located.

Outside of having the LLC you'll need separate book & bank account for the LLC to operate it separately. And ensure to not intermix the business and personal between the two. 

And also you'll want to be cautious with adding 2 people to the LLC. There are a lot of accidental partnerships created.

As a tax professional I would recommend going with a specialized independent attorney. 

My experience with clients utilizing the large firms is high priced packages that are often more robust than the client's needs at that point. Additionally it can often results in multiple additional tax filing requirements riving their tax filing costs up unexpectedly. 

An LLC doesn't change anything for taxes. It gives you no benefits.

Are you sure about that no fees or ongoing renewals? 

You typically want an LLC where the property is because it's a state specific device so you want it to apply to the asset you're trying to protect. 

If your wife and you are both on an LLC you....most likely do have a partnership. 

There is an exception if you are in a community property state- but otherwise 2 people on an LLC creates a partnership. 

All of that being said. If this is your first rental- what are you trying to accomplish with an LLC? 

No. There's something called the step doctrine. 

Basically just putting a step in the middle of a disallowed transaction that is really only there with no actual profit/business/clean motive except tax avoidance...is not valid. 

There are several other issues with this; but just know at it's core it's an attempt at tax avoidance-not tax reduction. And it's not valid.