All Forum Posts by: Sean Morrison

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

Seems like there's a lot going on here. The primary reason for putting a property into an LLC is for asset protection purposes, but there are some trade-offs. Transferring to an LLC can trigger a "due on sale clause" with the bank, meaning they could call in the balance of the loan, and your state may charge transfer taxes. LLCs typically also pay higher mortgage rates and insurance.

For estate planning purposes, the LLC is unnecessary if there is a living trust. Transferring the property to the trust avoids probate, and doesn't trigger any transfer issues. The largest problem occurs when a property is owned out of state, because then a probate must be opened in that state as well. An LLC or a trust can avoid that problem.

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

The first place to look is the operating agreement, which should have a section on membership. If there is no such section, or no operating agreement, then the LLC is controlled by your state's default laws. You'll need to look that up to determine how it's done and what's required.

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

This is the trade-off with LLCs. Insurance rates go up. The issue is less about piercing the veil, and more about giving the insurance company an excuse not to pay out because the LLC is not the primary covered. LLCs are great, but insurance is the first line of defense. You need to determine how much asset protection you gain from the LLC versus how much you lose through either paying higher insurance premiums or taking the risk of not being covered when the time comes.

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

I see three issues with this arrangement. First, it's worth reconsidering whether the LLC is the best arrangement. LLCs typically don't qualify for property tax homestead exemptions, and pay more for mortgages and insurance. Good insurance is always the first line of defense.

Second, the primary purpose of having an LLC is asset protection for the members, but that only works if it's treated like a company. If some of the members live there, the line between personal and business property starts to blur.

Third, members have a fiduciary duty to the company. If there were a dispute between the members (hopefully that doesn’t happen with family), a rent-free arrangement could be characterized as self-dealing (taking personal benefit from company property). Rent doesn’t necessarily need to be paid, and it would be a double taxation issue, but a contract outlining the arrangement signed by all members would certainly be helpful.

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

There seem to be a couple options. The simplest is to have both members sign off on the transfer for the bank, then it's clear the LLC's authority. Another option might be to have the parent LLC have a Manager. If the Manager has authority to accept assets for the LLC, then it does not matter whether the Manager has majority control (or any ownership at all). That would require a change to the operating agreement. Moving shares between members does not require amending the operating agreement.

It's worth talking to an attorney to get the structure set up correctly so you don't encounter this, or other unforeseen snags in the future. 

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

If I understand correctly, the owner that has their name on the mortgage wants out, but you don't want to refinance the mortgage due to the rates. Is that about right?

One option, depending on your state, could be a contract for deed, or bond for deed. It's a form of seller financing where the seller (in this case the person trying to get out of the deal) contracts with the buyers (the rest of you) to sell the house, but the buyer's name stays on the deed until the house is fully paid off. An escrow agent then handles the monthly payments and makes sure the PITI is paid. Since the deed never changes name, the mortgage company doesn't complain as long as they are getting paid.

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

First, corporations are rarely the right entity for a passive real estate investment. LLCs are typically better. Second, it seems you're speaking to the wrong people about the wrong things. Your CPA knows taxes, but not liability - that's for an attorney. Your mortgage broker knows mortgages, but not corporate income requirements - your CPA should. Cut down on the noise by asking the right person the right things. 

Liability can be managed with an LLC, but you can also use insurance and that should be your first line of defense. If you're purchasing property with an LLC, you'll find you don't qualify for traditional lending rates. You'll pay higher commercial rates. As for transferring title between yourself and the LLC, that has two issues. First, will your lender trigger a due on sales clause (ask your mortgage broker)? Second, will you owe transfer taxes (that is very state, and even city specific sometimes)?

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

As a general rule, real estate holding LLCs should be created in the same state as the property. While some states have better protections for LLCs than others, when it comes to real estate courts only want to recognize local protections. If you want a foreign LLC as a holding LLC, you could do that, but it's just more paperwork and fees.

Since there are partners involved, you really want an attorney to help put together an operating agreement for you.

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

As a general rule, real estate holding LLCs should be created in the same state as the property. While some states have better protections for LLCs than others, when it comes to real estate courts only want to recognize local protections. Remember that there is a difference between active and passive income. Passive real estate investments are usually LLC holding companies. But active income companies, like flipping houses or wholesaling or repairs, are usually best kept separate. A lot will depend on whether you are working on a passive or active income business.

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

As a general rule, real estate holding LLCs should be created in the same state as the property. While some states have better protections for LLCs than others, when it comes to real estate courts only want to recognize local protections. If you want a Utah or Wyoming LLC as a holding LLC, you could do that, but it's just more paperwork.

Keep in mind that even if the LLC is in Texas, California requires that it also be registered in California, which is another $800 fee per year.