Client owns 15 residential rentals...wants LLC

[AZ-Tax]

New client is elderly, widowed and has 4 children. All rentals are titled in his individual name and is inquiring about placing all rentals into one LLC or each rental in its own LLC. Also inquired about creating a C Corp or S Corp, having all children shareholders and having all his rentals placed in there. At his death all properties will go to his children. What do you think would be the best route to go?

[Gary2]

I can't give an authoritative answer, but I have plenty of questions.

There's plenty of information available on how putting real estate into a corporation (C or S) is a bad idea. I believe that would include having an LLC electing to file as a corporation.

As for the LLCs, is the goal to protect against liability, to minimize inheritance taxes, or something else? What is the incremental cost of having an LLC (which may differ from state to state if the properties aren't all in the same state)? Is the combined value of the rentals enough to justify the cost of having an estate planning attorney handle it?

Is the intent to have all of the children inherit a 25% share each property? No matter how well they get along, it may be better to make arrangements for each child to inherit full ownership of some subset of properties.

[gboykin]

I agree with Gary2 on the undivided interest of a subset of properties. Could get real messy for the kids, unless the LLC remains in the estate, and the properties are never transferred.

[AZ-Tax]

More info that may help

I can't give an authoritative answer, but I have plenty of questions.

There's plenty of information available on how putting real estate into a corporation (C or S) is a bad idea. I believe that would include having an LLC electing to file as a corporation.

As for the LLCs, is the goal to protect against liability, to minimize inheritance taxes, or something else? What is the incremental cost of having an LLC (which may differ from state to state if the properties aren't all in the same state)? Is the combined value of the rentals enough to justify the cost of having an estate planning attorney handle it?

Is the intent to have all of the children inherit a 25% share each property? No matter how well they get along, it may be better to make arrangements for each child to inherit full ownership of some subset of properties.

All properties are located in AZ. If all properties were placed into 1 LLC with each child as a member, the LLC processing fee will be around $300. Each rental havig their own LLC, then obviously that will be costly to create all the LLC's and am I correct that each LLC would have to file its own form 1065 Partnership? Have yet to learn if children get along and even if they did today, could be different story upon my client death. As I understood my client, liability protection is goal as is a structure for which these properties can pass to his children easily at his death with min inheritance tax.

[ChEAr$]

Unless there is a cogent reason for segregating each property in a separate LLC, I would advise client to put them all in one LLC , a single member LLC with her as only member.

Then deal with inheritance issues via the will.

of course she should consult competent local legal help.

[Gretel]

I have another question. When you say rental, do you mean a single apartment or house or multi-apartment rental?

I feel it very advisable putting them into a LLC and agree with Harlan on single-member, if allowed in your state. Then it is reported on Sch. E's. Maybe having one LLC per child to make issues after death easier?

[dsi]

AZ, we can offer you tax suggestions for putting them all into one LLC, multiple LLC's, or a corp, but your client really should consult with an attorney if he is looking for liability protection.

[Mo Sheets]

Just a thought....

I'm not really sure myself but I've heard (no, not from my hairdresser...ha...ha) that the reason behind multiple LLC's is if the tenant or someone who is injured sues the LLC, each LLC would contain only one property, therefore, less exposure financially. As an example, each property is worth $100,000. LLC is sued....the assets total $100,000 instead of multiple properties in one LLC whereby the assets could total a substantially higher number.

In this instance, I would definately have the client check with an attorney if limited liability is their concern.

Another option might be a revocable trust, if liability is not so much a concern. The client could title all of the properties in the name of the trust and each child could be a beneficiary of the trust.

Good luck!

Mo

[Gary2]

All properties are located in AZ. If all properties were placed into 1 LLC with each child as a member, the LLC processing fee will be around $300. Each rental havig their own LLC, then obviously that will be costly to create all the LLC's and am I correct that each LLC would have to file its own form 1065 Partnership? Have yet to learn if children get along and even if they did today, could be different story upon my client death. As I understood my client, liability protection is goal as is a structure for which these properties can pass to his children easily at his death with min inheritance tax.

A single member LLC won't file a partnership return.

The more I think about it, the more I think that the right answer is to speak to an attorney first, then come to you to talk about the tax implications.

[AZ-Tax]

Multiple LLC's as told to me by my Attorney client

I'm not really sure myself but I've heard (no, not from my hairdresser...ha...ha) that the reason behind multiple LLC's is if the tenant or someone who is injured sues the LLC, each LLC would contain only one property, therefore, less exposure financially. As an example, each property is worth $100,000. LLC is sued....the assets total $100,000 instead of multiple properties in one LLC whereby the assets could total a substantially higher number.Mo

Mo, one of my clients is an attorney with 2 rental properties. I acquired him when he had one rental property. When he purchased the 2 rental property, he created another LLC and he was his reasoning: Assume one of the many worst scenarios. Tenant is injured and becomes paralyzed due to the steps you the landlord never repaired. Tenant depletes your rental ins policy’s liability, then goes after the rental. Wait, there are more rentals in the LLC, the tenant goes after them. If each rental property has its own LLC, its stops with that one and only LLC.

Also, these are individual residential rental houses.

[jaybird]

Multiple LLCs - requires a lot more work. The whole basis of this is liability protection, so if anything at all is commingled, a court will rule towards substance, one company verses 15. So that means 15 checking accounts, 15 different quickbooks files, etc. It seems like a better strategy for the accountant's pocket? So the risk/reward in reality is less appealing.

[kpangelinan]

Mo, one of my clients is an attorney with 2 rental properties. I acquired him when he had one rental property. When he purchased the 2 rental property, he created another LLC and he was his reasoning: Assume one of the many worst scenarios. Tenant is injured and becomes paralyzed due to the steps you the landlord never repaired. Tenant depletes your rental ins policy’s liability, then goes after the rental. Wait, there are more rentals in the LLC, the tenant goes after them. If each rental property has its own LLC, its stops with that one and only LLC.

Also, these are individual residential rental houses.

This was the reasoning behind why most people in my area put each building in it's own separate LLC, but outside of the fees to start the LLC, assuming it's a single member, how is it any more work on the schedule E?

The additional partnerships I can see if there are going to be partners.

[Gary2]

As for the extra work for multiple SMLLCs, while there may not be anything extra for the federal Sch. E, there may be separate filings and fees to the state.

Would a double-entry bookkeeping system (e.g. QuickBooks) really be needed? I'd imagine that a checking account per LLC would be enough.

[Burke]

With 15 residential properties and no other active occupation, he may wish to also inquire of his attorney the implications of being a real estate professional, especially if he often buys and sells them.

[JON]

Mo

is right. LLCs are to protect from liability other assets. The attorney says have on for each. Liability is a strange thing, but you want to protect your client.