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**ChEAr$** · 03-29-2013, 05:24 PM

First question is: Did father "transfer" title to the property to the LLC? IOW, go thru all the hoops to satisfy transferring legal ownership of the property to the LLC?

**Koss** · 03-29-2013, 05:25 PM

LLC Contributions

The son owns 99% of the LLC. Father owns 1%. Then Father contributed his rental property to the LLC. Son did not make any contribution to the LLC.

Brilliant. Did they consult an attorney or a tax advisor before consummating this transaction?

Better hope there's no mortgage on the property, 'cause that will make this thing 1000 times more complicated than it already is.

Is there an LLC operating agreement?

I don't think it is automatically treated as a gift. A multi-member LLC is automatically treated as a partnership for tax purposes, unless they made some other election.

In a partnership, it is not all that unusual for a partner to hold an interest in the partnership without having made a capital contribution--even if other partners have in fact made capital contributions. And the allocation of distributions does not necessarily have to be the same as the percentage of capital contributions.

So, yes, this gets really complicated really fast. If they did this for no other reason than to try to avoid estate tax, then the transaction lacks economic substance, and it probably won't work.

But there might be a method to the madness. Sometimes partnerships are organized so that one partner puts up the money (or other assets), while the other partner puts in work. This is common, for example, in startup businesses such as restaurants. One guy puts up the money, but never sets foot in the restaurant; the other guy puts up NO money, but works 11 hours a day running the new restaurant. The partner who doesn't contribute any money can be said to be "earning" his ownership interest through "sweat equity."

Yes, these are complicated arrangements. And a rental property is not a restaurant. It's a passive activity.

Or is it? Is the son actively managing the rental property?

The proper treatment of this thing hinges very heavily on the operating agreement. There must be a written agreement. If there isn't, then how did they establish the ownership shares of 99% and 1%?

What does the operating agreement say about capital contributions, equity, and distributions?

BMK

**Koss** · 03-29-2013, 05:31 PM

Title to the Property

Did father "transfer" title to the property to the LLC?

That's certainly a valid question. I assumed that the answer is yes. The original post says that the father "contributed" the real estate to the LLC.

I did raise the question of whether there is a mortgage. If there was no mortgage on the property, it is relatively easy, in most states, to complete this type of transfer. It would not require a complicated real estate "closing" with thousands of dollars in fees, and it would not require title insurance.

The father simply had to sign a deed to transfer the real estate to the LLC. Here in central Ohio, a competent attorney would probably do that for a couple hundred dollars.

Or they might have gotten a do-it-yourself deed from legalzoom, or something like that. If they did, they may or may not have filled it out correctly. And they may or may not have properly filed the deed in the county recorder's office.

Like I said, it's a good question. In my previous post, I assumed that this part was done correctly.

BMK

**veritas** · 03-29-2013, 05:41 PM

First thing that comes to mind

Is built in gain and a possible attempt to shift dad's future tax to the son.

Not that anybody would ever attemp that.

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Interesting situation

Interesting situation

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