LLC and Husband and Wife

[S T]

Husband and wife create an LLC for a residential real estate holding.

The real estate has a mortgage and the existing mortgage company will not change the name to the LLC on the note. (remains in the husband's and wife's name)

What is the best way to handle so that the LLC is responsible for the mortgage and can take the mortgage interest deduction.

Sandy

[BOB W]

Llc

Sandy> I'm not sure that it matters (tax wise), as the LLC is a pass-thru entity and all will end up in the same location. The other option is to refinance the mortgage.

[Jesse]

Mortgage from H & W

Could H & W make out a loan agreement and mortgage the property from H & W to the LLC? The LLC could then make the payment to H & W and H & W then could make the mortgage payment.

In what name is the property titled?

[Gretel]

Mortgage

Sandy, I think the most important issue is how the property is titled for mainly for liability purpose.

Since you report the rental on Sch. E I see no problem in regard to deductibility of mortgage.

[S T]

Rental Real Estate

Could H & W make out a loan agreement and mortgage the property from H & W to the LLC? The LLC could then make the payment to H & W and H & W then could make the mortgage payment.

In what name is the property titled?

Husband and Wife transferred title of property into LLC, however, mortgage company will not change name on mortgage note.

Sandy

[Jesse]

If the property is titled to the LLC and the LLC makes the payments I would not think it would be an issue, but I'm no expert.

Some type of written agreement or amendment to the LLC agreement to document the transaction between individuals H & W and the LLC can't hurt.

[abby]

Tax ID

Is there an EIN for the LLC? We have a big client who keeps getting mortgages in his own name for all his many entities, and we attach a statement to both returns describing the loan and the Tax ID on the 1098. We also state that the entity claiming the deduction has made the payments. I can't promise that this won't ever blow up on him, but it hasn't for more than a decade.

The problem is that the loan co is going to lend to the person or entity that meets there lending criteria and the client is going to get the loan and get on with business. Getting a loan company to change who's responsible for the loan is near to impossible.

Still, if they have not applied for an EIN for the LLC and if the reporting is done on the schedule E, then I don't think there is an issue. Are you filing a partnership return or going directly on the sched E?

[S T]

LLC- S Corp election

Husband and Wife form an LLC for real estate rentals effective 2/16/05. There will be passive losses from the rentals. While reviewing the articles I found that a clause was included

Tax Classification of LLC: The members of this LLC intend that this LLC be initially classified as a S Corp for federal and state income tax purposes. It is understood that all members may agree to change the tax treatment of this LLC by signing and IRS Form 8832

. Taxpayer did sign and file form 8832 for S election and received an EIN#.

Question, since this is a husband and wife, investing in real estate rentals (not flipping or buying/selling) would the tax treatment be better as a LLC or S Corp?

If LLC is the choice, will the taxpayer have to file as S Corp for 2/16/05 - 12/31/05, revoke S Election, then file as LLC in 2006. Will this have any tax implications?

Sandy

[JG EA]

Late

Sandy, I'm getting into this late, and I don't know what you'd do if the mortgage is not named under the corporation, but as far as tax consequences it seems to me that an LLC would be better.

I have seen S-Corps that hold real estate and it passes through pretty much the same way as it would have if it not been in a corporation. I picked up this particular return already started that that way - there was no compensation to the shareholders. Perhaps there didn't have to be. I didn't have to deal with it long because the property sold -but for the time I did have it I always worried about reasonable compensation.

Dealiing with another investor S-Corp, I did research and concluded that there always had to be reasonable compensation. The thought was - what would you pay someone to do what you do even if it is very little, they wouldn't do it for nothing, etc.

[abby]

abby

Sandy,

I don't know off the top of my head if they can revoke the S-election for 2005, but it would seem that since it's still 2005 there should be a way to do this. There are so many ways around late S elections that it only seems right the reverse should be true also!

I just can't see an advantage, with the facts as you present them, to complicate this business by shackling it with S-Corp restrictions.

An LLC is less (read: virtually not at all) federally regulated and there is the option of not filing a seperate return at all.

An initial partnerhsip return can be filed for an investing partnership that contains nothing but an election to opt out of filing future 1065 and reporting all activity on the partner's individual returns.

Truthfully, rightly or wrongly, I've seen married couples do this even without the election as they form an LLC for each rental property and report directly on the sched E.

If the real estate is going to be the only activity, then I agree that wrestling with reasonable compensation issues, etc seems excessively complicated.

Here's a thought, too - if the S election fails for some reason, then are they stuck with real estate in a C corp and suddenly faced with double taxation? Interesting possibility.

My question: why is that choice written into the agreement? If a lawyer suggested this, then what was that person hoping to accomplish? Or was this a boiler plate agreement of some kind?

Hope that helps.