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Transfer of rental property to an LLC
Posted on 4/29/13 at 9:29 pm
Posted on 4/29/13 at 9:29 pm
So, let's say two people are buying a rental property (splitting the costs evenly) and bring a third person on to manage it. The two buyers are putting the downpayment on the property down on a 15 year loan. The property manager will earn his 1/3 ownership over the 15 year term of the loan (once he manages it for 15 years, the mortgage will be paid down completely, and each person will be a 1/3 owner).
The two buyers are expecting for the cash flow of the property to pay the note, so their contribution is the downpayment while the third member is contributing his management services. Is it possible tax wise for the 2 buyers to contribute the property and mortgage to the LLC so the LLC can pay the mortgage directly and all three members can share the depreciation for tax purposes? Or would an acceleration clause in the original loan documents with the bank prevent this transfer from happening since the bank must be notified of title transfers/assignment of the mortgage and might require the loan to be paid down immediately?
I want to be fair to the manager and make sure he gets his cut of the depreciation. I'd think the bank wouldn't care as long as the checks clear. I see it as two people contributing their equity (property sales price minus loan = buyer's basis) while the other contributes his services to the LLC. As long as the mortgage is outstanding, the two buyers are on the hook for the loan (even if the LLC defaults). What says the MB?
The two buyers are expecting for the cash flow of the property to pay the note, so their contribution is the downpayment while the third member is contributing his management services. Is it possible tax wise for the 2 buyers to contribute the property and mortgage to the LLC so the LLC can pay the mortgage directly and all three members can share the depreciation for tax purposes? Or would an acceleration clause in the original loan documents with the bank prevent this transfer from happening since the bank must be notified of title transfers/assignment of the mortgage and might require the loan to be paid down immediately?
I want to be fair to the manager and make sure he gets his cut of the depreciation. I'd think the bank wouldn't care as long as the checks clear. I see it as two people contributing their equity (property sales price minus loan = buyer's basis) while the other contributes his services to the LLC. As long as the mortgage is outstanding, the two buyers are on the hook for the loan (even if the LLC defaults). What says the MB?
Posted on 4/29/13 at 11:39 pm to meldawg399
It's possibe to do what you propose, but it isn't cheap to set up.
Posted on 4/30/13 at 12:56 pm to Poodlebrain
How much would you estimate Poodle? We already have a lawyer drawing up the contract for our third member to manage the property with a vesting schedule so he shares 1/3 in the profits and losses but gets each year of his management he vest in 1/15 of the ownership.
Would you do any of that sort of work or be able to suggest anyone? I guess we'd need a tax CPA to look at our agreement to make sure we're covered from that angle.
Would you do any of that sort of work or be able to suggest anyone? I guess we'd need a tax CPA to look at our agreement to make sure we're covered from that angle.
Posted on 4/30/13 at 2:10 pm to meldawg399
Do not transfer the property to the LLC unless you have written authority from the bank to do so.
I have recently seen someone do this and had his loan called. He ultimately lost his property.
I have recently seen someone do this and had his loan called. He ultimately lost his property.
Posted on 4/30/13 at 4:33 pm to meldawg399
The cost to have the LLC operating agreement drafted and executed is usually the greatest cost involved. It is dependent on the attorney(s) you use and the complexity of the document. The order events occur will impact the cost. Forming the LLC and executing the operating agreement before any money is spent to acquire the rental property usually lowers the cost since it is generally less costly to acquire the property as the LLC than to acquire outside and transfer to the LLC.
You should realisticlly expect to pay at least $2,000, and you should not have to pay more than $5,000 if you use experienced professional advisors. I have done this sort of work. I can be contacted at tdpoodlebrain@gmail.com if you would like more detailed information.
You should realisticlly expect to pay at least $2,000, and you should not have to pay more than $5,000 if you use experienced professional advisors. I have done this sort of work. I can be contacted at tdpoodlebrain@gmail.com if you would like more detailed information.
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