Client owns 15 residential rentals...wants LLC

[Burke]

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..

I incurred a client with an S-Corp which owned a shopping center. It conducted no other business in the corp and owned no other property. There were two shareholders. All net income was distributed to the 2 shareholders every year (it never had any losses.) After 7 years, it was sold, and the K-1's distributed all the income, & capital gains including unrecaptured 1250, to the two shareholders. It was never a problem.

[Gary2]

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.

While I agree that the key questions should go to the attorney, why isn't this a question for the tax professional? In this case, widowed and elderly, I'm guessing the properties aren't being bought and sold, and the 750 hours aren't there.

On the other hand, I can imagine that some state and local jurisdictions could distinguish between a homeowner renting out half of a duplex and a professional landlord. Perhaps different rules for the security deposit, prompt maintenance, etc. (I don't know of any, I'm just speculating.)

[kpangelinan]

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.

Yup you're right....forgot about that. In Maine it's $85 a year....x15 every year....

[Gary2]

I incurred a client with an S-Corp which owned a shopping center. It conducted no other business in the corp and owned no other property. There were two shareholders. All net income was distributed to the 2 shareholders every year (it never had any losses.) After 7 years, it was sold, and the K-1's distributed all the income, & capital gains including unrecaptured 1250, to the two shareholders. It was never a problem.

That's the exception, particularly with having no losses and no mortgage issues that could complicate their basis. I suggest using your favorite search engine for never put real estate corporation.

[ttbtaxes]

Obviously, you need to work with the attorney regarding the legal liability issue.

Having said that, and also after having seen families broken up by sibling rivalries, I wonder if it makes sense to have a single-member LLC formed for each child/beneficiary. Dad would place the rental properties he wants child A to have in LLC A. The properties he wants child B to have in LLC B, etc., through LLC D.

Dad would remain the single member of each of these LLCs but then, upon his death, the properties would be split up in the manner dad wanted by virtue of these four separate LLCs and each sibling would get properties free and clear of other siblings.

It would avoid a potential mess down the line and get properties into more than one LLC for liability purposes.

[Gary2]

Obviously, you need to work with the attorney regarding the legal liability issue.

Having said that, and also after having seen families broken up by sibling rivalries, I wonder if it makes sense to have a single-member LLC formed for each child/beneficiary. Dad would place the rental properties he wants child A to have in LLC A. The properties he wants child B to have in LLC B, etc., through LLC D.

Dad would remain the single member of each of these LLCs but then, upon his death, the properties would be split up in the manner dad wanted by virtue of these four separate LLCs and each sibling would get properties free and clear of other siblings.

It would avoid a potential mess down the line and get properties into more than one LLC for liability purposes.

I'm not sure how that would help. Unless the state has a provision for a successor member for the LLC, the LLC would dissolve on death, the properties would all revert to being owned by the estate, and you'd still need the will to specify who gets what.

I've never heard of being able to specify an heir in the LLC documents, but I suppose anything is possible.

I agree with the idea of having each property put under the ownership of just one heir. Possibly the parent may be able to sort them out now. But since heirs can move, property values can change, etc., my inclination would be to charge an independent trustee with sorting things out after death.

[JON]

Did I miss something?

Did the current owner die? If he moves ownership to an LLC with child as the beneficiary-he has a gift - the LLC records the basis at FMV or cost basis -whichever is lower. All of a sudden that has become a problem. I read fast, but I think if transferred to LLCs he keeps ownership and hopefully gets some limited liability. If he wants to start gifting after that it becomes like the old family limited partership where you are taking discounts on the gifting of the partnership (LLC) interests. Good Luck...

[VT-EA]

LLC ownership passes to child by the will at death.

The 15 checking account problem could be solved by a 16th LLC that is a property management company.

[Gary2]

I think we're straying into issues that are legal questions that could vary from state to state and which are best addressed by an attorney.

Whether or not a property management company would avoid the multiple bank accounts would depend on whether the company could issue the multiple distributions directly to the single owner of all the other LLCs. If that doesn't serve to maintain the separate nature of the LLCs in that particular state, then the property manager is still stuck writing a check to each individual LLC for their share of any profits for their particular property. Perhaps the bookkeeping is a bit easier, but not by much.

Likewise for the inheritance. In the one LLC that I own, the papers are clear - the LLC dissolves upon death. The assets can be distributed by will, but the LLC itself (or membership in the LLC, to be precise), can't. Now perhaps that's because I didn't have the attorney address that issue, so I'll ask him. In my case, there was a conscious effort to avoid any partnership treatment, so the LLC documents don't even have provision for accepting additional members.