I created the wrong entity for real estate!

[PieThief]

So, at the beginning of the year part of the action I took was to create an entity for real estate. Sadly, I got some bad advice and created a C-Corp. I have since been told many times that this is a pretty bad entity to hold real estate in (for a buy & hold/rent strategy). At least I took action, but now I'm sitting with this corporation that has done no business, and the end of the year (tax year ends Dec 31) coming up and I'm not sure what to do.

Can anyone think of a reason to keep the entity around if I'm not doing any business with it? Or should I look into having it dissolved and form an LLC?

Ideas welcome.

 

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[Diane Kennedy]

So, at the beginning of the year part of the action I took was to create an entity for real estate. Sadly, I got some bad advice and created a C-Corp. I have since been told many times that this is a pretty bad entity to hold real estate in (for a buy & hold/rent strategy). At least I took action, but now I'm sitting with this corporation that has done no business, and the end of the year (tax year ends Dec 31) coming up and I'm not sure what to do.

Can anyone think of a reason to keep the entity around if I'm not doing any business with it? Or should I look into having it dissolved and form an LLC?

Ideas welcome.

It sounds like you'll be okay with just dissolving, but for anyone else reading this, do NOT dissolve a corp lightly. There are often unintended tax consequences when you do so.

But, assuming that you did no transactions and didn't move any assets to the C Corp, you should be fine. A C Corp, as you discovered, is not a good entity for real estate because you lose the long term capital gains treatment when you sell and it's impossible to transfer out of without a tax consequence.

Now - what to do with the company.... What TYPE of real estate investing do you plan to do? If you're doing rehabbing, fix and flips, wholesaling or any other form of short term hold strategy, you have a business - not an investment. That means that you are better off having an S Corp. If that's the case, make the S Corp election on your C corp and you're golden.

On the other hand, if you're going to hold these long-term, then you will want an LLC taking the default tax treatment.

 

[PieThief]

You are right an LLC sounds like the right way to go as we are looking at a long term rental investment strategy.

Is this something I should have an attorney handle or is it "straightforward" enough to do it yourself?

Thanks for your help.

 

[newtothis]

how are you,

i am actually have the same type of question, right now me and my friend are looking to buy some properties and probably keep them and rent them out for some time, not to sell them, unless there will be some really good offer. So now, would it be better with C-Corp or LLC corporation? Under which one we can write more off at the end of the year, lets say for repairs, and what about in case of bankruptcy witch one will protect us the most.

thank you

 

[hakrjak]

LLC is the way to go for real estate... Especially if you are planning to "lose" some money for awhile... Very similar to an S-Corp for any other kind of business venture you might have started up in the past or your future. Losses flow through to your personal taxes and can be written off against your income to a certain degree. Always very handy when getting started.

Actually holding property inside of an LLC seems to be a bit of snake oil that has been peddled out there. This idea was drummed up in all the Kiyosaki books for a number of years, but like a lot of things RK tells people to do -- It's not exactly a reliable method to fall back upon.... Unless you are able to pay cash for all of your properties, and own them outright. I only know a couple of guys who do this personally, by quit-claiming their property to their LLC... As most are afraid to trigger their "Due on Sale" clause by doing this. The bank does have a right to call your loan due if they catch you deeding your property to an entity without their permission (And they don't give their permission, ever....) The mast majority of us in this business just carry huge insurance policies, and then we can forgo the asset protection that an LLC can give you.

Best of luck,

- Hakrjak

 

[EasyMoney_in_NC]

You are right an LLC sounds like the right way to go as we are looking at a long term rental investment strategy.

Is this something I should have an attorney handle or is it "straightforward" enough to do it yourself?

You don't need an attorney. You can actually go online with the IRS and fill out the election to LLC status. I don't recall the form #, maybe 2550? Dianne, chime in on this one. And the beauty of the LLC (at least in NC) is that the structure indemnifies the members, something an S corp doesn't do.

Oh.....just got a pop up, time to go bid on more silver 😀

 

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[Allthingznew]

Would there be any advantage to having the Corp own the LLC(s) and the Corp's business be to find, manage, etc. properties to go into the LLC(s)? I use the possibility of multiple LLC's because I've seen people use one LLC per property.

 

[Diane Kennedy]

I don't have time (tax season) or inclination to get into a big debate about this, again....

Here are the facts, and you can either take it or leave it.

- An LLC with default taxation will protect the assets held within the entity from other claims. So, if you have a business and real estate and you hold them all without any entity protection, and get a lawsuit with your business - the real estate is at risk. If something happens with the real estate and you get a lawsuit, the business is at risk. If all you have is the real estate and there is a lawsuit without an entity, your personal assets are at risk.

- It is not "snake oil", whatever that means. It's basic law.

- You can transfer ownership into an LLC without risking the due on sale clause. My clients and I have been doing that for over 20 years.

- If a C Corp holds an interest in real estate, either directly or through another entity, you lose the capital gains benefit upon sale and if you sell, then distribute the proceeds, you'll have double taxation.

 

[reipro]

The postive is that you took action. It is not bad that you formed the wrong entinty. You can always keep the entity and use it at a later date. There are benefits of having a "C" corp such as paying benifits health insurnace and 401K plans. You can always switch it to a sub-chapter S and use it if you are going to flip any properties.

 

[mtnman]

What bad things happen when you dissolve a corporation?

I'm curious as well.

 

[hakrjak]

- It is not "snake oil", whatever that means. It's basic law.

- You can transfer ownership into an LLC without risking the due on sale clause. My clients and I have been doing that for over 20 years.

The "snakeoil" i was refering to was how RK and others peddle that you can easily transfer all of your properties under an LLC for asset protection. It simply isn't something you can do unless you:

a). own your property outright
b). have an LLC large and established enough to have it's own credit, and you have used it to purchase the real estate directly.

I'd like to hear how your clients are doing it, since I've personally called my banks and asked each one if they would be OK with me deeding my properties to my LLC for asset protection, and they all responded with a resounding "Absolutely not."

I don't doubt that there are people out there doing it anyway, and not getting caught. I personally wouldn't even want to take the risk of getting caught though, when I can get a $1mil umbrella policy for $15-20 a month, that gives me adequate protection from liability issues.

Cheers,

- Hakrjak

 

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[NoMoneyDown]

I'd like to hear how your clients are doing it, since I've personally called my banks and asked each one if they would be OK with me deeding my properties to my LLC for asset protection, and they all responded with a resounding "Absolutely not."

Same here. The "most popular" way I've heard is by creating a Land Trust (recorded) and transferring beneficial interest from you to the LLC (not recorded).

 

[phlgirl]

What bad things happen when you dissolve a corporation?

Since Diane is super busy, I thought I would mention that I was re-reading parts of her book the other day and saw something about this topic.

If you happen to have her 'Loopholes of the Rich' book, there is information about dissolving a C Corp in Chapter 23, pages 231-232.

Note: the version of the book that I have is fairly old - circa 2002, I beleive.

She mentions that it is a serious matter and if done incorrectly, can cause significant penalties & double taxation (there is a follow up chapter on double taxation).

I suppose the impact is different depending on the type of Corp you are dealing with.

 

[EasyMoney_in_NC]

The "snakeoil" i was refering to was how RK and others peddle that you can easily transfer all of your properties under an LLC for asset protection. It simply isn't something you can do unless you:

a). own your property outright
b). have an LLC large and established enough to have it's own credit, and you have used it to purchase the real estate directly.

I'd like to hear how your clients are doing it, since I've personally called my banks and asked each one if they would be OK with me deeding my properties to my LLC for asset protection, and they all responded with a resounding "Absolutely not."

I don't doubt that there are people out there doing it anyway, and not getting caught. I personally wouldn't even want to take the risk of getting caught though, when I can get a $1mil umbrella policy for $15-20 a month, that gives me adequate protection from liability issues.

Cheers,

- Hakrjak

It all depends on how you approach the issue of LLC with the lender. It also depends on your relationship with them, payment history, LTV etc and who approaches the lender for you. I just got all my mortgages out of escrow requirements. WAMU for instance told me it wouldn't happen, they don't do that. Well guess what they're doing for me? Thats right.
Getting back to LLC and transfers, one also needs to worry about the title insurance co., they'd void a policy if there was ever and issue if you don't re-insure under the new entity. You got a NO because it may have been the fact that YOU asked or how you asked as apposed to someone who does it for a living. I had numerous attorneys that told me they could get my properties transfer into LLC properly and without DOC kicking in. The banks however do tend to not be thrilled about transfers, but if approached properly, it can be done. Dianne may have over simplified her answer, but she is busy and all 😀

 

[AroundTheWorld]

It really depends upon your..... hmmm.... approach and unwillingness to take "no" for an answer.

True story:

We closed on a deal the had about 4 parties, each owning a portion of the property as TIC. Only one of the owners personally guaranteed the loan. It took a little "working" with the bank, but in the end, they got it done.

One month later - we were working on a second deal. The same bank approved the loan. It was also to be held as TIC. This time, the bank said, "no, we don't do that."

Obviously, they did.... as they had JUST done it for us one month prior. Sometimes it just means talking to numerous people and using different approaches until you get what you want.

 

[EasyMoney_in_NC]

Exactly ATW. I had to go up a few levels of management before I got what I wanted. The call center drones just give you that "canned" responses. I literally told them that this was not my first rodeo, and if they didn't start treating my business (multiple mortgages) as if they gave a shee shee, I would simply refi it to someone else. I finally got a very nice lady in NY that has been my go between with the escrow "back office" and we are almost through the process. Its been a bit of a PITA, but I pump out ten of thousands each year in escrow $$.....its worth a bit of my time to get my money back in my control (and making interest) until its due.

These days, lenders should be kissing the asses of those who do the right thing, look at what courting the other side of the tracks has gotten them!

Be persistent or find someone who can be for you!

 

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[andviv]

http://www.taxloopholes.com/connect/blog/megan-hughes/2008/01/getting-real-estate-out-your-n

 

[Diane Kennedy]

Couple of quick comments:

The issue with putting an appreciating asset inside of a C corporation is that if you sell it, you pay tax at the ordinary income tax rate (no special treatment for capital gains).

If you have an asset inside any type of corporation (S or C) and distribute the asset out, you must do so at Fair Market Value. That means if you have real estate that has a basis of $100,000 and is now worth $200,000, when you distribute or dissolve, you have a taxable event, creating a taxable gain of $100,000.

One of the reason that I always recommend an LLC or LP, is that they are ruled by partnership law (unless the LLC has elected S or C treatment). Partnership law allows you to distribute at basis, so there is no taxable event.

On the range of experiences on having the mortgage company allow you to move the property into an LLC:

It is possible to do it. I've done it personally dozens of times. My clients have done it hundreds and hundreds of times. And I absolutely believe anyone who posts here and says that they could not do it.

At the risk of starting another Kiyosaki firestorm... About 8 years ago, I did some seminars with Robert in Sydney, Aus. I remember that a lady stood up in the seminar room and openly challenged him on how he could buy property that would cash flow. "You can't do that here!" she exclaimed.

Robert (as I'm sure some of you can imagine) was incensed. He shouted back, "Don't you ever tell me what I can and can't do. I CAN do that here. YOU are the one who can't."

Okay, not always the epitomy of tact, but he's right. And i get frustrated when I hear someone stating that you (meaning me and everyone else reading this thread) can not do something, when I know it's simply not true. I believe that the poster can't do something and had a bad experience, but that doesn't invalidate all the hundreds of people who can do it.

Thanks Andres for the link to Megan's blog post. The Living Trust method, which she didn't go into huge detail on, ALWAYS works. In fact, it's a federal law that they must allow transfer to a revocable trust. So, it's the fallback. But, I've never had to go that far.

If you are getting "no", you're asking the wrong person.

 

[skeebadeek]

Awesome thread! I think Diane, Easy Money, Andres and a few other have already answered the question of transferring property so I wont bother agreeing, except to say "I agree".

Pie Thief, if you are still listening.. Almost everyone here is suggesting that you use an LLC for your real estate investments. However, this isnt always that simple for a beginner. Typically you will need a commercial loan, unless you are paying in cash. What many new investors end up doing is buying the property using his/her/someones.. personal credit and eventually transferring title to an LLC for liability protection and tax benefits.

There are other ways of acquiring property, even for newbies. You can also take title in the LLC at the time of purchase but your personal assets as collateral. The trick is to find the right residential bank that offers the right programs for investors. Rehab loans are usually where you start looking.

 

[hakrjak]

Couple of quick comments:
On the range of experiences on having the mortgage company allow you to move the property into an LLC:

It is possible to do it. I've done it personally dozens of times. My clients have done it hundreds and hundreds of times. And I absolutely believe anyone who posts here and says that they could not do it.

Possible, yes... You can just quit claim it over, and hope for the best. The authority I trust the most on this is Bronchick, since he is an RE Attorney -- and he agrees that 9 times out of 10, the bank does not want to do a foreclosure on your home.... They will probably look past this small indiscretion, and let you alone... And even if they do call your loan due, you can simply refi (usually.. unless you've lost value to the point where you are upside down)

A risk all are willing to take -- maybe not. You never know what the bank will do, depending on conditions out there.

Cheers,

- Hakrjak