I have a client who owns a Corporation and just purchase a piece of investment property (single family house) in Florida which will soon be rented out. The mortgage company would not allow her to put the title of the property in the coprorations name and the mortgage is in her name as well, since the bank would not finance the corporation. She would like to put the investment property in the corporations name by ways of a quit claim deed but I'm afraid that might trigger the mortgage company to demand full payment of the mortgage. Has anyone come across a situation like this and what would you suggest would be the best way to bring the investment property into the corporation.
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Many practitioners feel it is malpractice to allow a client to put real estate inside a corporation. See TTB, page 18-5 for a discussion of this issue.
Your client should use an LLC to hold the rental property if she needs liability protection. -
Uhhh ... methinks you meant "advise"
To allow? To advise, perhaps.Originally posted by Bees KneesI'm not so sure this is nearly as effective as everyone seems to think. Do LLCs really shield their owners from liability for personal injury or other torts? I wonder. Isn't this what liability insurance is for? And assuming there is insurance, does the LLC add any additional degree of protection? When it comes to liability to creditors an LLC usually isn't effective there either. Yeah, you might be able to stiff the gardener, but the big lenders will either have a deed of trust on the property or insist on a personal guarantee from the LLC's underlying owner/member(s).Originally posted by Bees Knees
FLATTAX: Regarding your original question posed, before transferring title to her corporation, your client should ask the lender if that will trigger a call on the loan ... and she should get its reply in writing.
Regarding the wisdom of making the transfer, it is usually ... but not always ... inadvisable to have C corporations own real property. However, there are times when it makes good sense to do so. One is where a corporation has capital losses it can't deduct and has little prospect of ever deducting. Unlike an individual's perpetual capital loss carryover, a corporation's capital loss may only be carried over for 5 years (and back 3 years). Another is where a corp owns capital assets that have declined in value. In situations like these it may be good planning to put real estate in a corporation in order that the hoped-for appreciation and capital gain can be offset by existing or unrealized capital losses inside the corporation. None of this applies to S corps.Roland Slugg
"I do what I can."Comment
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LLC for rental property
One of my clients was thinking about setting up a corp for his rental property. I have read a lot of comments about this on this and other message boards which indicate that it is generally best to use the LLC. I don't even remember all the reasons, but I heeded their advise.
I advised him to set it up as a single-member LLC. I also advised him to get my daughter to do it instead of the high-priced lawyer he was going to use. I told her to make sure it was a single-member LLC so he wouldn't have to file a partnership return--which could be pretty difficult for a guy whose bookkeeping is pretty low-level.
The LLC would be of some legal protective value, but, there would still be a need for insurance. Even if the LLC protected the owner completely, he would not want his LLC to be bankrupted by a lawsuit.Comment
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You didn't say so but I'm guessing the down payment was from corporate funds? If true you need the client to pay back from personal or at least have a note signed by the client acknowledging the debt. Like some clients they would of course like to go spend some quality time in the corp investment property. Its just not a good thing.Originally posted by FLATAX
I agree it would best be in a LLC, but here again any change must have the blessing of the mortgage company. I don't know of any reason an LLC would not give the owners the same protection as would a corporation. Insurance is a definite need in any case.Comment
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No, I meant do not allow. Kick, scream, threaten to fire them, but if you know what is good for you as a tax practitioner, you better not allow your client to put real estate into a corporation.Originally posted by Roland Slugg
Scenario,
Your client has rental property she has owned since 1985 with an adjusted basis of $45,000 after depreciation. She now gets the bright idea that she needs liability protection, and a pushy attorney says she should put that rental property into a corporation. She asks you about it and you advise her that might not be such a good thing. You are polite. You give her numbers that go in one ear and out the other. She didn’t really understand your point, so she goes ahead and does it anyway.
Two years later, she is tired of filing corporation tax returns and liquidates it, taking the rental property back as a liquidation distribution. She still owns it, but now she sets it up as an LLC because her cousin told her that would be so much easier to set up and operate. No more dumb tax returns to file. She just throws everything on the Schedule E, and is a little irritated you didn’t tell her that two years ago, which you did, but she has since re-written history in her mind.
Oh, by the way, she doesn’t tell you about the corporate liquidation thing until nine months later when she comes to you to file that Schedule E that is soooo much easier to do.
You ask her what the thing was worth….9 months ago….
“Oh, I don’t know, I guess about a half million by now….”
After you calmly calculate she now owes $68,250 without considering ordinary income on the depreciation recapture, she storms out of your office insisting you should not have let her put it into a corporation. You get a letter from her attorney two weeks later informing you she is suing you.
Not to worry…I’m sure she will remember every word you said two years prior on the phone when she called and you advised her it might not be such a good thing to do….Comment
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he can foreclose
>>you might be able to stiff the gardener<<
The gardener can file a mechanic's lien which will prevent you from refinancing or selling. If you still won't pay him, he can foreclose.Comment
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Thanks
for the posts Bees Knees. I think your scenario is right on. It looks likes like if she wants to be shielded from personal liability she should put the property in it's own LLC. If she were to buy more property would it be advisable to set up a seperate LLC for each one? Thanks again for everyones postsComment
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she IS personally responsible
>>she wants to be shielded from personal liability<<
Do the LLC if it gives her peace of mind. Then get the insurance for the real world.
If she is personally liable because of something she personally did or didn't do, then it won't make any difference at all how her property is titled. It might make a difference for something somebody else does, like a tenant, but she would still be named as a defendant in the lawsuit. She might win--it would probably cost at least $20,000 in legal fees. (Of course winning would also prove that those legal fees are not related to the rental, so they aren't even deductible.) So she needs the insurance anyway to protect against the legal fees, and in that case the insurance will also cover the liability even if she IS personally responsible.Comment
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Treatment for S-Corp
Just for future refernece, if this was an S-Corp that the investment property was going into would it basically have the same tax implications at the time when the property is sold as putting it into a single member LLC?Comment
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If the property is going to stay in the entity until the property is sold, there is no issue here. Both the S corp and the LLC would pass the gain through to the shareholder/member to be taxed once on his or her 1040.
The issue here is deciding later to take the property back out of the entity without selling it. If the only activity is the investment property itself, why have it sit inside a separate entity where separate tax returns may need to be filed? Distributing the property back to the shareholder and liquidating the S corp would trigger gain on the appreciation. Distributing the property back to the LLC member (assuming the LLC has not elected to be taxed as a corporation) and liquidating the LLC would not trigger gain on the appreciation. The LLC simply is the wiser choice for holding appreciated property, because no gain is ever triggered until the property is actually sold.Comment
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I think the problem here is the issue of not looking into the future. When people set up separate entities, whether it is a C corporation, S corporation, or LLC (single or multiple member LLC), people do not always think about the possibility that sometime in the future, they might want to liquidate that entity. Many only think about the tax consequences of things while that entity exists. What happens to the real estate when it is sold through the entity? What happens to the income it produces while it is inside that entity? What is the best way to handle expenses incurred by the owners of that entity? How can I save on Social Security Taxes on the various entities? What fringe benefits can I have through that entity? Etc.
Those are all important questions in the decision process of deciding the best entity for a particular tax situation.
We also, however, need to ask the question of, what happens if that entity needs to liquidate? What happens to the assets inside that entity if the owner of the entity wants to retain ownership of the assets after the entity is dissolved? Real estate is an asset that is often retained by the owners after a business fails. In many cases, the real estate is retained even after a business is sold, as the buyers might only want the goodwill and customer list of the business, but not its real estate.
That is where choice of entity could come back to haunt you, if you did not address all the questions.Comment
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Thanks
for your input Bees Knees. I think you hit the nail on the head with your last 2 posts.Comment
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