Are There Any Tax Consequences When Changing Title To A Trust?
My husband and I started investing last year and now own four properties...all of them titled and mortgaged in our personal names. For asset protection purposes, we want to change title (I guess by quit claim) into a land trust, with our LLC as beneficiary (we are the only members of the LLC).
I realize that there is a possibility of triggering the due-on-sale clause doing this (has this really happened to anyone?), but I'm wondering if there are other, tax, consequences to the title change...for instance, if we've held the property less than one year, are there going to be short-term capital gains to pay since we 'sort of' sold it?
Any ideas on how to work the title change for the least financial impact (now and later)? Thanks!
It depends.
In a normal transfer from the taxpayer (Grantor) into their own grantor revocable trust there should not be any tax consequences, as long as the trust that they are transferring into is a grantor revocable trust.
You have added one additional twist, which may or may not be an issue. The beneficiary of your trust is an LLC. If it is considered to be a "disregarded entity" for income tax purposes you should be O.K. because the LLC would be ignored and the effect would be the same as if you owned the property as individuals. To be considered a disregarded entity the LLC must be a single member LLC. A dual or multi member LLC is not considered to be a disregarded entity and would not be ignored for income tax purposes. The husband and wife issue is the complexity. The IRS recently issued a ruling that helps clarify this issue. If the husband and wife are the only (sole) members of the LLC, and they live in a community property state, and they file a joint income tax return, then the LLC will be considered to be a "disregarded entity" for income tax purposes and ignored and you should not have any tax issues with your transaction. If you do not live in a community property state and/or file a joint income tax return the ruling does not provide any guidance.
Hope this helps.
[addsig]
And if you're not in a community property state? (Iowa is a equitable distribution state)
Kamarion,
Just to throw my two cents in - With regard to the due on sale clause. The Garn-St. Germain act which made the due on sale clause specifically excludes transfers of property for asset protection purposes from the due on sale clause.
Depending on what & where the property is, what state it's in, there might be state tax issues to be determined.
e.g., in WA , I'm informed that our state has taken the position that such a transfer IS excise tax taxable and the avoidance of same is illegal.
I'm told that there are at least a couple of Ass't WA AGs whose duties are to scrutinize any apparent efforts to circumvent such tax avoidance.
But even if the State of WA weren't taking that position, it just makes legal sense (to me, not everybody!) that if the transfer is legitimate, a transfer tax is due...just as it would be on any legitimate transfer ot title.
[addsig]