As a newbie RE Investor, I have acquired a few properties and now I’m trying to decide which business entity is recommended by you pros? What factors should I consider?
Once the deed is in your name, the horse is out of the barn. You'd have to pay doc stamps, etc. to deed them into your newly formed entity, and potentially trigger a due-on-sale clause.
Between S Corps. and LLCs', real estate investors should almost always prefer the LLC, unless they can't find anyone (like a spouse or child) to share ownership interest with (to avoid the LLC having "disregarded entity" tax status), and don't want the resultant merger of their business and personal tax information on a 1040 with an attached Sched C. In that case, an S Corp filing its own 1120-S and passing tax consequences to the 1040 through the mechanism of a K-1 affords more financial privacy during any IRS audit.
For rental properties, I would definitely recommend an LLC. LLC's provide legal protection, and are fairly inexpensive to create. If you will be the only member of the LLC, then the IRS considers the LLC a disregarded entity, and you will be able to report your income on schedule E, instead of having to file a form 1065, and giving yourself a K-1. This will save you money with your tax professional.
I'm in the process of buying a duplex and since i haven't gotten my papers back from the state for my LLC, i figured i'd put the property in my name, then transfer it over via quit claim. Kick me for thinking it'd be simple enough to do. I can't have the deed recorded in the LLC's name til the LLC is legal, am i going to be stuck with it in my own name unless i pay hefty fees? (sorry for the semi thread jacking!) Could you explain a bit more what to expect when transferring?
Thanks for all the replies. It seems like LLC is the way to go. How difficult is it to transfer title to a newly formed LLC? I don't want to trigger a due-on-sale clause. Should I talk with my bank about this potential change?[ Edited by stameyr on Date 10/21/2003 ]
So, when the LLC formation is finally finalized, then you will transfer to the LLC via quit claim? As long as you have adequate liability insurance on the duplex, this shouldn't be an issue. But as soon as the LLC is formed, transfer.
I'm curious about that too. A lawyer told me he recommends to transfer property to an LLC as soon as possible, after closing. So I don't think it is a big issue. But, by nature, I'm not satisfied until I see it in writing : )
Maybe I should go read one of my mortgages, the due-on-sale clause should be in there, right?
Rentalman,
that's what i plan to do, i'm using a HELOC to pay for it so the title will be clear. Now, if i can just pull it all together at the same time!! <IMG SRC="images/forum/smilies/icon_smile.gif"> The duplex is almost 5 hours away, home inspection is this weekend, then we'll talk about closing. Thanks for your replies.
Once the deed is in your name, the horse is out of the barn. You'd have to pay doc stamps, etc. to deed them into your newly formed entity, and potentially trigger a due-on-sale clause.
Between S Corps. and LLCs', real estate investors should almost always prefer the LLC, unless they can't find anyone (like a spouse or child) to share ownership interest with (to avoid the LLC having "disregarded entity" tax status), and don't want the resultant merger of their business and personal tax information on a 1040 with an attached Sched C. In that case, an S Corp filing its own 1120-S and passing tax consequences to the 1040 through the mechanism of a K-1 affords more financial privacy during any IRS audit.
For rental properties, I would definitely recommend an LLC. LLC's provide legal protection, and are fairly inexpensive to create. If you will be the only member of the LLC, then the IRS considers the LLC a disregarded entity, and you will be able to report your income on schedule E, instead of having to file a form 1065, and giving yourself a K-1. This will save you money with your tax professional.
My opinion is that a disregarded entity offers the best of both worlds. you still have legal protection, but filing requirements are much easier.
As far as deeding over the property, in Iowa, I believe you simply need to file a quit-claim deed, fairly simple to do.
I'm in the process of buying a duplex and since i haven't gotten my papers back from the state for my LLC, i figured i'd put the property in my name, then transfer it over via quit claim. Kick me for thinking it'd be simple enough to do. I can't have the deed recorded in the LLC's name til the LLC is legal, am i going to be stuck with it in my own name unless i pay hefty fees? (sorry for the semi thread jacking!) Could you explain a bit more what to expect when transferring?
Thanks for all the replies. It seems like LLC is the way to go. How difficult is it to transfer title to a newly formed LLC? I don't want to trigger a due-on-sale clause. Should I talk with my bank about this potential change?[ Edited by stameyr on Date 10/21/2003 ]
lorien,
So, when the LLC formation is finally finalized, then you will transfer to the LLC via quit claim? As long as you have adequate liability insurance on the duplex, this shouldn't be an issue. But as soon as the LLC is formed, transfer.
stameyr,
I'm curious about that too. A lawyer told me he recommends to transfer property to an LLC as soon as possible, after closing. So I don't think it is a big issue. But, by nature, I'm not satisfied until I see it in writing : )
Maybe I should go read one of my mortgages, the due-on-sale clause should be in there, right?
Rentalman,
that's what i plan to do, i'm using a HELOC to pay for it so the title will be clear. Now, if i can just pull it all together at the same time!! <IMG SRC="images/forum/smilies/icon_smile.gif"> The duplex is almost 5 hours away, home inspection is this weekend, then we'll talk about closing. Thanks for your replies.
becki[ Edited by lorien on Date 10/21/2003 ]