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Tax question

Taxes and regulation

yveskleinsky

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I have heard before that the best way to protect assets is to form some sort of business entity. I will be buying either multifamilies or commercial office buildings (or both) in the near future. Should I form an LLC now and just keep it handy for when I do move forward? How do you guys form you entities and when? ...I am also married and my husband wants no part of what I am doing (sigh) and I want to give him peace of mind. Can I form an LLC with just me and would that protect him?
 
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kurtyordy

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I use legalzoom for my entities, but my personal belief is that they are not neccessary until you have 20+ units. Smaller than that and a good umbrella policy will cover you.
 

EasyMoney_in_NC

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I am in the process of working out your question's issues right now. And after plenty of money to attorneys, here's what my education has afforded me (your state may be different). Owning as husband and wife is the safest. Unless you can buy (incl. financing) in your own name, as soon as you move from tenants in common (H&W) to owned as an entity, you MUST give up one or the other of - either ownership (own a very small 1% of the investment as so not to jeopardize equity under lawsuit, but control it all) or control (majority share holder but have no control over day to day opps). Plus you are adding to your paperwork load, extra tax forms (and costs if you get charge by CPA per the form), and multiple bank accounts (no co-mingling between properties incomes/expenses).

What I think ends up being the best scenario, as much as I hate to do it (I have no trust in it) is to over insure everything and follow all the common sense rules, ie: make sure properties don't have lawsuit type structural or functional issues, put all agreements on paper for a trail etc.....

And the final problem is that again, as an LLC, LP or other entity, you won't find financing easy at all. If you do find it, the rates will be horrible as will the rest of the terms.....and you'll still have to personally guarantee it, so a good attorney may get you there. Own it easy, leverage it high (no one will sue you for your debit!) and enjoy using the money. I swear all this corporate entity crap is a way for attorneys to make easy money and to see who can make things the most difficult and to see who is smart enough to break through their barriers.

But please do your research, your area may be different and I'm not an attorney.........nor do I play one on TV.........nor did I just save money by switching to Geico :D
 

Diane Kennedy

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I ALWAYS buy with LLCs. Period. Put it this way - the first black mold case in Dallas, TX settled for $125 million. My umbrella policy isn't that big. I'm not sure anyone's umbrella policy is that big.

I used to co-host a nationally syndicated radio show. One of the most poignant callers was a gentleman who has 6 homes, free and clear. He owned them all in his own name. He had a tenant from h*** and did everything wrong trying to evict her. Eventually it ended up in court and in court he said, under oath, "She's just plain crazy." Her attorney pressed her and he said, "Well, she didn't seem crazy when I rented to her, but she just got weirder and weirder."

He evicted her and later found black mold in the house. It was the kind that has been linked to a whole range of diseases, included mental illness. Guess what - his tenant heard about it and sued him for $11 million.

That's when he called into the radio show - now what? We asked how he held the properties and because they were all in his name, they were all at risk. His umbrella policy (like most of them) was only $1 million.

He was in his 60's and had, he thought, done everything right - worked hard, invested and paid off his debt. Now it's all gone.

I get loans in my own name and then transfer into a LLC, so I'm never paying more than I would normally. There is a cost to set up and if you're in CA you have to pay outrageous annual fees. I just got done writing a check for $800 for our CA LLC. And, you have to do good bookeeping and file an extra tax return (maybe).
 
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Russ H

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We hold all of our properties in Ltd Partnerships with a C Corp as the General Partner.

Both of us limited partners have 49% ea (general partner has 2%), so no one has majority ownership.

Lots of reasons for doing this in CA. LLCs tend to work as well, or OK, in other states.

Like Diane, we buy in our names, then immediately transfer into the partnership. ALL of the lenders are cool with this, when they are told we're doing this for assett protection (b/c this is in *their* best interest, too)

BTW, we also have balloon policies-- but that's only to cover the small (under $3,000,000) stuff. :)

-Russ H.
 

ProInvestor

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I wouldn't buy an investment property in my own name....
usually investors by 1 or 2 houses n their own name and then start to buy in company/trust.

As for the 20 units comment - that is insane! Thats up to 20 potential lawsuits (the more property you own the higher the risk). In fact I know someone (who buys very expensive property (+$1million) to use the equity) who places each property in it's own company. New property, new company added with non recourse loans and highest LVRs he can get. He then plays further with it (by options trading) to make sure there is virtual no equity available for any creditors).

Rgds.
ProInvestor
 

Russ H

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ProInvestor-

We've had no problems buying w/entities for commercial loans, but it's been tough w/residential loans.

Any advice?

-Russ H.
 
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yveskleinsky

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I am loving how everything is starting to come into focus! So, I buy the property as a residential property and transfer it into an LLC ASAP. That makes sense. The whole buying a property through an LLC didn't make sense to me as it is expensive and the rates are terrible. Thanks for the feedback.
 

EasyMoney_in_NC

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The old man that owned them outright was stupid. Mortgages are good debit. And the more debit on them the better. Even an 11 million dollar suit wouldn't come after 6 highly encumbered properties. And depending on where he is located, like in NC, income can't be attached by creditors. If you own an entity, there is considered to income AND profit. Personally held and with a track record of income, there is no profit. Another issue is that of "Due on sale" should the lender find that the property has been retitled, and what about title insurance, will they follow along?
Getting back to old man. If he was married, he should have titled the properties in his wife's name if he intended to own outright. If he was single, he should have had debit on them, or in his case put them in entities since he wasn't worried about loans etc and probably had all sorts of time during his day for the extra paperwork etc.

Once you turn into a company, everything changes. If you don't cash flow much, you can really forget it after incorporating. Now I know, the supporters would scream "but its a small price to pay", but if you do the right things under personal ownership.....your probably just as safe, and with a lot less hassle. Here's to hoping none of us ever find out :cheers:
 

andviv

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I've seen people paying thousands of dollars for courses on how to do this. The advice from Diane and Russ is exactly the same that my friend got after paying a $5K class about asset protection. We are getting that information here for FREE. HOW GREAT IS THAT!!!

EasyMoney, I agree, I hope nobody here finds out. I am no expert at all in this topic, but your strategy sounds risky to me. It seems as you have done your homework though. I just don't think that would work for me. I wouldn't have piece of mind doing it that way.

I haven't read yet what the solution is for the question about the LLC protecting her husband. What I do is to put everything under my name only (her name is not in our loans) and nothing under hers, so if anything goes wrong I'm the one with the loan problem and she should be OK, but I am not sure how strong is this strategy. I think Diane mentioned in other topic something similar.
 
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Russ H

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but if you do the right things under personal ownership.....your probably just as safe, and with a lot less hassle.

Sorry, Easy. I gotta call you on this one.

Incredibly bad advice.

It only works until you're sued.

And then, you're screwed.

Do the work, protect the properties.

-Russ H.
 

Bilgefisher

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yveskleinsky,

I want to thank you. Even though you feel like your asking tons of questions, you have started some really great topics that have generated even better discussion. There are plenty newbies like myself that are learning priceless information from these responses.
 

Diane Kennedy

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Seems like I have a story for everything...

This one comes from an attorney friend of mine in NV, Garrett Sutton. Garrett did a seminar at Learning Annex and had a question from a participant about the business she had just started. He strongly advised that she form a business structure (LLC taxed as an S, or an S) before she started.

She argued that there wasn't any profit yet. He told her that the business structure doesn't protect the business - it protects all of your other assets! (Just like with real estate - if there is no equity in the property, who cares if they can get to your personal residence, savings accounts, investments, everything else you own. And that's what happens if there is no business structure)

She said she had no more money, but in 3 months she should start making money and she'd call him then to get the structure going.

He was happy to get her call in just 6 weeks. He figured she had finally come to her senses and was going to get a structure in place.

She told him instead that she was being sued and was probably going to lose. Her question was what could she do now?

His answer - ABSOLUTELY NOTHING.

If you are never sued, it doesn't matter, of course. And if you don't have any net worth it doesn't matter either. But, if anything ever goes wrong and you have ANYTHING at all of value, you want a business structure that has been set up right and run right.
 
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triple J

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Great story Diane. This topic comes up quite a bit and I've heard so many different arguments supporting both sides that I've never known what to do, but I think I'm finally convinced that I'm leaving myself open to trouble I need protection. Especially my properties being older and lead paint, stairs, etc...

We know it is very difficult to get loans in an LLC if you're buying residential properties. So for those of us that currently own residentials in our own name (my husband and I have 13 combined), what should we do? Is the best thing is to Quit Claim to our LLC? Should we write a letter to our banks making them aware of this? Call them? Have a letter from an attorney? I think the way the banks find out is when the insurance changes?

Currently, I have an umbrella policy. Would I need to keep it for my primary residence and autos? Would I need an umbrella over the properties in the LLC? Or just keep a ton of debt on the properties and no $$ in the LLC bank account?

Thanks in advance!
 

EasyMoney_in_NC

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Sorry, Easy. I gotta call you on this one.

Incredibly bad advice.

It only works until you're sued.

And then, you're screwed.

Do the work, protect the properties.

-Russ H.

I qualify my comment with "check your area". In NC your home cannot be taken nor can income, just profit and equity. So if there is NO profit or equity, whats left? My car, okay.....small price to pay I guess. Money, I could sink it into a Whole life insurance policy (also not attachable in NC) and then thats a bust. Keeping in mind that with the court systems as slow as they are, there would be plenty of time to make anything of value disappear. And again anything held as H&W means that both would have to be sued to loose anything left.

I don't know, you're damned if you do AND if you don't! I don't like either alternative, but.........

you must agree, that it only works until you're sued works both ways? Corporate veils can be pierced too, and then what? If every I isn't dotted and T crossed, someone will find a way through that corporate structure.

I appreciate your opposition though Russ, this is how we all learn. Teach me something :)
 

Wolfgang5150

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That brings up a good question about cars. Is there an equivalant LLC or corporation that people title cars in, to protect from lawsuits, etc? Aside from a big insurance policy. (I'm not talking about Ford F-150's either). Our prides & joy is what I'm referring to.
Thanks.
Kevin
Orchard Park, (lawsuit happy) State of NY
 
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randallg99

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Both of us limited partners have 49% ea (general partner has 2%), so no one has majority ownership.
-Russ H.

this is a great, great idea... cannot emphasize enough how strong this is for both tax liability purposes as well as accident/casualty liability exposure.

each one of my properties have been structured differently (older properties are still under my personal name and I do not want to trigger one of the clauses, so until paid off, or at least drastically reduced, they will remain in my name)... more recently, I have used Sub S, LLC and personal ownership tactics with the gearing of them towards estate planning...

... also regarding cars and liability... auto insurance companies have available umbrella policies over and above the liability coverage in 1mil increments. Since my wife is considered half owner (I am in NJ) of everything I own and owe, she also has significant additional coverage...

while on the subject of structuring the entities, we need to remind ourselves we dont live forever and planning for while we are here enjoying each the assets is a great idea, but planning for the estate when the inevitable time arrives is a must-do prudent step in managing the assets... insightful accountants and good tax attorneys are required and this is probably one time I would suggest paying good money for bullet proof advice.

Regards
 
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Russ H

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randallg99
insightful accountants and good tax attorneys are required and this is probably one time I would suggest paying good money for bullet proof advice.

That is *exactly* what we did.

-Russ H.
 

EasyMoney_in_NC

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That is *exactly* what we did.

-Russ H.

+1, and for me, the big picture is still to far out at my ripe age to plan for 30 years from now. We have wills that cover everything in place. I'm not a place where estate planning is what I am after. I am in the financial acquisition period in life at this time. My daughter (8) has here own bank account with money, as will my son (5 months) at some point. Life is fairly well taken care of and my wife will have a nice state pension and benefits in time (15 years).

I will get to the planning stages, if all goes as planned and I retire in a few years, which will be when I can concentrate on it, see the end picture etc.....
 

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