Should rental properties be titled in my name?
In the military I move every 2-3 years. As I move to a location, I take out a mortgage in my name and purchase a single-family, detached home which is titled in my name, and I live in until I am reassigned. When reassigned to a new location, I put the old home on the rental market and purchase another in the new location. To date I have kept rental homes titled in my name. Should I form an LLC (or some other business entity) and put the homes into that?
Answers (20)
Short answer, probably yes. I would definitly speak with a lawyer to get the in and out of it. All of my rental properties are in a LLC of a LLC to increase the arm's length and to double the corporate vail. This is great protection and it really costs less than a $100 for LLC in my state. It takes time, but after you've done one, the next several are pretty easy. It protects your personal assests from litigation if something were to happen in the rental property. Once you establish the LLC, then you title the property over to it (again depending on the state you are in).
I'm not versed in the tax implications of what you are doing but on the surface I would question the following:
You may be voiding any Primary Home Exemption through such transactions. When converting the property from a primary residence to a rental property your accountant should be consulted so that you can adjust your primary home taxable basis, and set a new basis for the property to be treated as a rental property with a depreciative base.
Transferring the property from a personal asset to a rental asset may also have ramifications as to the financing on the property. Here again you should discuss this aspect of transferring the property from a primary residence to a company or LLC asset may have an impact on the in-place financing.
Gerry G.
Multi-Housing Consultant - Licensed Real Estate Agent at Kirkham Real Estate
Eric: It all depends on your goals of ownership. You have positioned your question as a transition from being an "accidential owner-landlord," to an "Independent Rental Owner." Or, one who is graduating from "passive" to "active" ownership.
Do you have a clear "vision" of where you will be when you retire from the military? Do you have visions of Donald Trump, or Wilford Brimley? Do you have a good relationship with your accountant? Have you talked about asset protection?
I am assuming that you own 2 or more homes at this time. How do you manage the prior location at this time?
Remember, your goal should be to make money in all three phases of real estate ownership: 1) When you Buy. 2) Management. and 3) When you Sell. Do you currently have a plan for each stage, per individual profit center (property)? I would suggest you send a note to Mark Kholer, real estate attorney and accountant, and ask him to identify the legal ownership status that would be the most beneficial to you. Mark@kkolawyers.com... I have a number of client's who have been very satisfied with him and or his associates. It's critical to do it right the first time!
Jim K.
Team Owner - KalamazooHomeTeam.com and Associate Broker at Keller Williams Realty
You should form an LLC for each property, or at minimum, one for all. This will limit your liability (potential loss) to the properties within each LLC. As you now stand, if someone were to sue you, all your properties are at risk. A suggestion is to name each LLC the property address. I recommend checking with your attorney.
Eric, First and foremost, thank you for serving our country. To your question, I agree with Craig about speaking with your lawyer. And you should also speak with your accountant/cpa/financial planner. LLC do offer some asset protection, and you could find out much more by contacting an asset management firm. If nothing else, the title should be place into your Living Trust.
To start an LLC wasn't much, however, you should be aware that an LLC must file for taxes each year, where or not the LLC has made any income. You may want to investigate the cost for your state, in CA just the filing fee is $800.00 each year.
Also, just another FYI. Many people think that the LLC will totally protect you from litigation. It doesn't, nor does any business entity, especially if they have not be set up correctly. That is why it is very important not to just seek out expert advice, but make sure they really are expert in that field. (not just any lawyer, or CPA, or Financial planner will do). I've been impressed with John Napolitano from US Wealth Advisors, LLC
Good luck, and thanks again.
Walter C.
Principal of a commercial real estate finance firm and management role with a regional PM, brokerage & leasing firm
Best Answers in: Commercial Real Estate (3), Venture Capital and Private Equity (2), Personal Real Estate (2), Hedge Funds (1), Option Markets (1), Using LinkedIn (1)
I think you should be doing these as an LLC, both for tax and liability reasons. The only property you should have in your own name may be your own home. There will most likely be no taxable event (ask a CPA) to transfer homes that have become rentals into individual LLCs.
Happy to discuss anytime,
Walter
It depends what are you trying to achieve by forming a LLC.
In my opinion forming an LLC is an overkill, especially one for each property. You can get liability protection by getting an umbrella policy. This policy can cover you upto 10million (Geico). I agree with Shelley, you will have to file tax return for the LLC every year and that fee can certainly hurt if you are considering more than 1 LLC.
I was actively thinking about LLC for my rental property, but decided to go with Umbrella Policy now to get enough liability protection.
Doug H.
Charter School Finance Expert
Best Answers in: Using LinkedIn (5), Education and Schools (4), Accounting (2), Labor Relations (2), Career Management (2), Ethics (2), Professional Networking (2), Customer Service (1), Mentoring (1), Occupational Training (1), Event Marketing and Promotions (1), Conference Planning (1), Foreign Investment (1), Venture Capital and Private Equity (1), Economics (1), Compensation and Benefits (1), Staffing and Recruiting (1), Work-life Balance (1), Advertising (1), Events Marketing (1), Internet Marketing (1), Viral Marketing (1), Public Relations (1), Sales Techniques (1), Business Analytics (1), Change Management (1), Organizational Development (1), Planning (1), Nonprofit Management (1), Philanthropy (1), Social Enterpreneurship (1), Quality Management and Standards (1)
An LLC should help protect you and your properties should you get sued. It seems to me in your case that would be the main advantage.
If you don't have an LLC, then at minimum, you ned to make sure you have some sort of umbrella insurance policy that is large enough to protect you from losing everything in a lawsuit on one property.
Greg N.
Off Market Residential Distressed Property Specialist: Bank Owned Foreclosures, REO’s, & Short Sales
I would intially purchase the property under your personal name. I would get a 30 year fixed mortage which will be priced as a residential primary home loan in opposed to an investment property (1/2 to 3/4 point higher). Once you determine that your going to rent the house out, then form a LLC and Quick Claim the property from yourself to the LLC.
Since you have a 30 year fixed and the bank does not look back you will maintain your favorable residential rate. As many of the others have noted, the LLC will provide some liability protection. One other item to note, is that as you now own serveral properties you should speak to your accountant about declaring yourself a "Real Estate Professional" for tax purposes. This allows you take all your passive real estate losses against ordinary income without a limit or a phase out. Note that with depreciation virtually all properties show a paper loss even when the cash flow positive.
Richard J.
CERTIFIED FINANCIAL PLANNER™ at Krasney Financial, LLC
Best Answers in: Wealth Management (8), Personal Investing (7), Personal Taxes (4), Personal Real Estate (4), Retirement and Estate Planning (3), Equity Markets (2), Professional Networking (2), Using LinkedIn (2), Certification and Licenses (1), Property Law (1), Personal Debt Management (1), Incorporation (1), Starting Up (1)
Eric,
I'm not sure if your military status offers you different benefits when it comes to owning real estate, however it would be important to determine that before you implement any of these suggestions.
When it comes to planning with rental real estate assets, generally I look at personal liability and taxes as two critical areas to address.
Establishing an LLC could help protect your personal assets from liability claims arising from suits originating from the property inside the LLC. The LLC generally limits claims to the assets inside the company, not your personal assets outside. When owning multiple properties, people frequently set up one LLC per property, providing protection to each property. Frequently one master LLC will manage all the others. There are legal and tax issues as to whether this makes sense in your particular situation, so consider this general big picture advice. Consult your own professionals.
From a tax perspective, titling assets can have an impact from an income and estate tax point of view. If your total net worth exceeds $2M, than correct titiling of assets from a tax perspective is even more critical since the government taxes a large bite when you die. It's critical to make sure that you title assets equally with your spouse (if married) to balance your estate for tax purposes.
Ultimately everything comes down to your individual situation, preferences, and financial picture. It pays to hire a good planner, attorney, and CPA who can help you with all of these issues and help determine what the best way is to proceed in your specific situation.
Hope this helps,
Richard
We generally recommend that most of our clients put their rental property into an LLC. However, without knowing the specifics of your situation, I have no idea if you fall into the "most" category or if there are some other factors that would suggest another approach. As others have said, there may be tax implications to doing this as well.
The main reason for my reply is to remind you that your mortgages probably have an acceleration clause that kicks in upon transfer of ownership. Many of the banks here will demand payment in full upon a transfer from an individual to an LLC owned by that individual. Not sure how active banks in others parts of the country are about this though. You'll have to refinance in the name of the LLC, but remember that the rates/terms will not be as favorable.
Keith M.
Enrollment Counselor
Best Answers in: Occupational Training (1), Staffing and Recruiting (1), Using LinkedIn (1)
I would suggest you listen to Mr. Kiyosaki (spelling sorry) he is much more of an GURU on this subject and his answer to that question is form an LLC or LLP to take control of any homes that are more then just your primary property. It keeps you from haveing to worry about the renters or other people on your property sueing you personally for something that goes wrong on the property.
It just about protecting yourself and your own assets. If you own more then 2 homes that are rentals then you really need to talk to someone about getting your LLC set up and when ever you move to another place have the old home put into the LLC or just do it when you buy the home in the first place.
Ken S.
Small Business Marketing & Internet Trainer - Dallas, Texas
Best Answers in: Personal Real Estate (1)
Eric,
As you can see from the responses so far, the answer is going to vary depending on the perspective of the person answering. There is a tax perspective, a liability protection perspective, and a financing strategy perspective.
As mentioned by Greg Nagel in his response, by purchasing the homes as you have done so in the past as owner-occupied transactions there is the benefit of getting the lowest cost mortgage financing. But the caution provided by Brian Sajdak is not to be taken lightly. When purchasing a home with a conventional mortgage you are going to sign either a mortgage document or a deed of trust depending on the state. That document is going to describe conditions under which the lender is giving you a loan. If you violate these conditions, you default on the loan even if you are paying on time.
The actual "trigger" term involved would be the "Alienation Clause" which typically states if you transfer ownership of the property to another entity you are considered to have "sold" the property and that brings about the "due-on-sale" clause. The lender is within their right to demand you repay the loan upon learning of a title transfer. For clarification, an "Accelleration Clause" means the payoff of the loan can be accelerated to NOW. That can happen for several different reasons, not just alienation.
You will no doubt get advice from some to suggest that as long as you pay the loan on time, the lender will "never know" about you transferring title from yourself to some commercial entity (LLC, C-Corp, etc.) That advice contains an element of risk because if you do get "caught" you will have to refinance or otherwise pay off the mortgage in a very short time period. By contrast, refinancing the property so that the loan is made to the commercial entity you want to transfer ownership to is going to be more expensive and more difficult to obtain.
So from purely a financing perspective, which is all I'm experienced enough to give you, the way you are going it now provides you the best overall financing for your propreties but realize that once you get 10 conventional mortgages, you will be capped out. Conventional loans will not be saleable to Fannie Mae or Freddie Mac after the 10th conventional loan you have. Once you get to that stage of a real estate portfolio you really do need to come up with a commercial financing strategy.
Wilton A.
Principal Research Scientist at Battelle Memorial Institute
Best Answers in: Personal Real Estate (2), Engineering (2), Mentoring (1), Staffing and Recruiting (1), Employment and Labor Law (1), Business Analytics (1), Supply Chain Management (1), Branding (1), Market Research and Definition (1), Product Design (1), Ethics (1), Biotech (1), Computers and Software (1), Using LinkedIn (1)
Just to offer consensus, I concur with all who've said "yes", you should put each property into some business entity. This provides, as has been said, more protection to you personally, and more importantly, keeps all the properties from being at risk should problems occur on a single property, assuming you structure the transactions correctly. Of course, consult your attorney, since your mileage may vary!
Setting up a separate legal entity for each rental property is very beneficial as it can provide a shield to your other personal assets and business investments. As a Real Estate Broker (I love the law, but am not an attorney) I have assisted my investor clients with creating a unique shell for each investment property; for example “123 Main EO LLC” or “6543 Central RM LLC”. Setting up individual “companies” is fairly easy and inexpensive (often less than $200) and most importantly helps to protect you and your investments from torts and other unforeseen litigation. Hope this is useful for you.
Although there are some benefits from incorporating, it may not be the best option. Your primary homeowner insurance policy normally covers up to 3 properties as part of an umbrella policy, which helps protect your current residence in the event of legal procedures against you by one of the tenants. Incorporating will have some impact to you from a tax and accounting/paperwork standpoint, and won't necessarily protect you and your other assets from a lawsuit. If you are not involved in the day to day management of your properities, it probably is better advice to incorporate. If you are in the day to day management and your insurance policy can cover all your properties (normally up to 2), keep it in your name.
Clarification added February 15, 2008:
3 properties total (personal and 2 rental)
Robert R.
New York City attorney and corporate executive concentrating in Commercial Real Estate, Leasing and Litigation
Best Answers in: Property Law (8), Air Travel (3), Business Dining and Entertainment (3), Travel Tools (3), Criminal Law (3), Facilities Management (2), Hotels (2), Staffing and Recruiting (2), Contracts (2), Corporate Law (2), Intellectual Property (2), Commercial Real Estate (1), Car and Train Travel (1), Education and Schools (1), Conference Venues (1), Financial Regulation (1), International Law (1), Finance and Securities Law (1), Employment and Labor Law (1), Internet Marketing (1), Professional Organizations (1), Telecommunications (1)
Before I follow up, please use the Clarify function and indicated how many mortgaged properties you currently own.
Paul S.
Associate Broker, Salesman, Communication specialist, Rapport Builder, Art Appreciator, Real Estate Investment Expert
Eric, Taking title to rental homes in your own name does create. exposure to all of your personal wealth, for example if a tenant gets injured on your property and sues you, all of your assets are subject to the suit, if however you create an LLC or some other legal entity to hold your properties, your exposure to law suits is only the assets held in that legal entity. I suggest you speak with a qualified attorney who specializes in Real estate. hope that helps
Realtor® Adam K.
Dynamic Real Estate Broker and Realtor Entrepreneur at http://www.HermannLondon.com
Put them into an LLC, if someone falls in one of your properties and sues you, do you want your other real estate to be taken away?
Links:
If you are planning to keep several homes then it would be best to have an LLC. This should help with assigning someone to manage the property or interface with the Property Management Company. It will also reduce your personal liability. Just make sure to surround yourself with trustworthy people/employees.
