How to hold title in a apartment building?
March 16, 2011 5:45 AM Subscribe
IKYNML, but...what is the best way to hold title of a rental income apartment building?
California, Bay Area. My wife and I own a seven unit apartment building (worth approx 800-900K) and a house which we live in (in a neighboring city worth approx. 500K). Currently, we hold title on the apartment as husband and wife, community property. As the liability risk is so high, I have been told by a number of people that we should hold title to the apartment as some other entity - an LLC, a trust, etc. Something that will limit the extent of liabilty to any hypothetical lawsuit involving the apartment to just that asset. Is this a good idea? The apartment is the source of about half of our income and the house and the apartment are our only real estate holdings. We owe about 250K on the apartment and about 300K on the house. What would be the best way to hold title on the apartment? How would we go about it? How much would it cost? Would it be a tax benefit to do this? Thanks in advance.
California, Bay Area. My wife and I own a seven unit apartment building (worth approx 800-900K) and a house which we live in (in a neighboring city worth approx. 500K). Currently, we hold title on the apartment as husband and wife, community property. As the liability risk is so high, I have been told by a number of people that we should hold title to the apartment as some other entity - an LLC, a trust, etc. Something that will limit the extent of liabilty to any hypothetical lawsuit involving the apartment to just that asset. Is this a good idea? The apartment is the source of about half of our income and the house and the apartment are our only real estate holdings. We owe about 250K on the apartment and about 300K on the house. What would be the best way to hold title on the apartment? How would we go about it? How much would it cost? Would it be a tax benefit to do this? Thanks in advance.
IANAL.
Yes, it is a good idea - I actually think it's kind of stupid for you not to.
Contact a real estate attorney. You will be setting up an LLC. You can call it "joyride LLC" or whatever you want.
I'm not sure how the process would work now that you already own the property - you might have to "sell" the asset to your LLC, and I'm not sure how that would work with your existing mortgage. This is what the real estate lawyer is for.
I don't know what the market is like in Cali, but in Texas I would expect this to cost ~$1500 for the lawyer's time.
Please do this though. You're setting yourself up for some potentially devastating consequences if something goes wrong.
posted by unexpected at 6:07 AM on March 16, 2011
Yes, it is a good idea - I actually think it's kind of stupid for you not to.
Contact a real estate attorney. You will be setting up an LLC. You can call it "joyride LLC" or whatever you want.
I'm not sure how the process would work now that you already own the property - you might have to "sell" the asset to your LLC, and I'm not sure how that would work with your existing mortgage. This is what the real estate lawyer is for.
I don't know what the market is like in Cali, but in Texas I would expect this to cost ~$1500 for the lawyer's time.
Please do this though. You're setting yourself up for some potentially devastating consequences if something goes wrong.
posted by unexpected at 6:07 AM on March 16, 2011
This is what JohnTReed has to say about LLC:
http://www.johntreed.com/entity.html
and (at the bottom)
http://www.johntreed.com/bestpracticesforintelligentrealestateinvestor.html
From what I know, LLC will be rather costly: you suppose to maintain separate accounts; you can't defend it yourself in court but have to hire a lawyer. It is not as bullet-proof as laymen presume; it's not a license to misbehave; and the default action by ANY lawyer in a tort is to add as many defendants into the suit as they could, then let the process sort itself out. They would add God himself to the suit if they think there is a chance of collecting.
So, no answer. Disclosure: I'm a fan of Mr. Reed.
posted by curiousZ at 6:58 AM on March 16, 2011
http://www.johntreed.com/entity.html
and (at the bottom)
http://www.johntreed.com/bestpracticesforintelligentrealestateinvestor.html
From what I know, LLC will be rather costly: you suppose to maintain separate accounts; you can't defend it yourself in court but have to hire a lawyer. It is not as bullet-proof as laymen presume; it's not a license to misbehave; and the default action by ANY lawyer in a tort is to add as many defendants into the suit as they could, then let the process sort itself out. They would add God himself to the suit if they think there is a chance of collecting.
So, no answer. Disclosure: I'm a fan of Mr. Reed.
posted by curiousZ at 6:58 AM on March 16, 2011
You can safely ignore anything by Mr. Reed, who doesn't seem to know what he's talking about.
You're talking about an almost $1 million asset which presumably serves as a significant source of income for you and your wife. The fact that you don't already have a lawyer to help you with the legal ramifications of this is mildly surprising.
An LLC is certainly one option, but so's a more traditional corporation or an S-corp. Which one is better for you and your wife will require a fairly detailed analysis of your financial and tax situation. Doing this right has the potential to have significant tax benefits. Doing it wrong has the potential to subject you to unnecessary tax liability at best and penalties at worst.
Short answer: you should almost certainly be holding this in some kind of business entity, but which kind is a conversation for you and your attorney.
posted by valkyryn at 7:29 AM on March 16, 2011 [3 favorites]
You're talking about an almost $1 million asset which presumably serves as a significant source of income for you and your wife. The fact that you don't already have a lawyer to help you with the legal ramifications of this is mildly surprising.
An LLC is certainly one option, but so's a more traditional corporation or an S-corp. Which one is better for you and your wife will require a fairly detailed analysis of your financial and tax situation. Doing this right has the potential to have significant tax benefits. Doing it wrong has the potential to subject you to unnecessary tax liability at best and penalties at worst.
Short answer: you should almost certainly be holding this in some kind of business entity, but which kind is a conversation for you and your attorney.
posted by valkyryn at 7:29 AM on March 16, 2011 [3 favorites]
This is bread-and-butter business work for an attorney, and a competent general practicioner should be able to provide you with advice with relatively little hassle. Besides the formation of the LLC, the biggest problem will probably be getting everything transferred into the LLC. Depending on how you have your financing set up, a transfer of the property from your individual names to an LLC could cause your lender to get nervous.
I suspect that a lot of the Google-able literature on the enforcement of "due on sale" clauses are out of date, given the huge changes in the real estate market (both residential and commerical) in the past few years. So getting advice from a lawyer who can opine on how to deal with your particular lender (after looking at your particular financing) is doubly critical.
Good luck. YANMC.
posted by QuantumMeruit at 9:09 AM on March 16, 2011
I suspect that a lot of the Google-able literature on the enforcement of "due on sale" clauses are out of date, given the huge changes in the real estate market (both residential and commerical) in the past few years. So getting advice from a lawyer who can opine on how to deal with your particular lender (after looking at your particular financing) is doubly critical.
Good luck. YANMC.
posted by QuantumMeruit at 9:09 AM on March 16, 2011
From what I know, LLC will be rather costly: you suppose to maintain separate accounts; you can't defend it yourself in court but have to hire a lawyer. It is not as bullet-proof as laymen presume; it's not a license to misbehave; and the default action by ANY lawyer in a tort is to add as many defendants into the suit as they could, then let the process sort itself out. They would add God himself to the suit if they think there is a chance of collecting.
This is true, sort of. Corporate structures aren't a license to misbehave, and it is *kind of* a strawman to assume that is what people think they are for. Of course the default action for a lawyer is to try to name all defendants possible; anything less would be malpractice-ish on behalf of their client. Of course you should maintain separate accounts, to do anything else is an exercise in futility and confusion.
But the point is what the outcome is. If there is a judgment against the person, all their assets are vulnerable. But by placing the business into a separate entity from the family, the worst thing a business failure can do is destroy the business.
All things being equal, a good insurance policy *may* provide the same protection. So in addition to talking to a lawyer, talk to an insurance person too.
posted by gjc at 9:25 AM on March 16, 2011
This is true, sort of. Corporate structures aren't a license to misbehave, and it is *kind of* a strawman to assume that is what people think they are for. Of course the default action for a lawyer is to try to name all defendants possible; anything less would be malpractice-ish on behalf of their client. Of course you should maintain separate accounts, to do anything else is an exercise in futility and confusion.
But the point is what the outcome is. If there is a judgment against the person, all their assets are vulnerable. But by placing the business into a separate entity from the family, the worst thing a business failure can do is destroy the business.
All things being equal, a good insurance policy *may* provide the same protection. So in addition to talking to a lawyer, talk to an insurance person too.
posted by gjc at 9:25 AM on March 16, 2011
You should definitely seek the help of a lawyer who is familiar with asset protection and probably also estate planning. You may want to have some other legal entity hold title or possibly create a trust, all of which may, if done properly result in some tax benefits. Some people may also overestimate the landlord's liability for interest when you have insurance for that soft of thing. Do make sure you are properly insured.
posted by Hylas at 9:51 AM on March 16, 2011
posted by Hylas at 9:51 AM on March 16, 2011
IAL.
The comments generally have it. The fashion today is to put the property into an LLC. If you own more than 1 rental property each should go into its own LLC so that each owns only 1 property.
To do this right and maximize protection of assets in the event of a claim requires some consideration and thought. It is well worth it to hire a lawyer to do this.
posted by BrooksCooper at 10:41 AM on March 16, 2011
The comments generally have it. The fashion today is to put the property into an LLC. If you own more than 1 rental property each should go into its own LLC so that each owns only 1 property.
To do this right and maximize protection of assets in the event of a claim requires some consideration and thought. It is well worth it to hire a lawyer to do this.
posted by BrooksCooper at 10:41 AM on March 16, 2011
I'm a litigator and this isn't exactly my area, but FWIW I would definitely lawyer up if I were in that situation.
posted by J. Wilson at 7:22 PM on March 16, 2011
posted by J. Wilson at 7:22 PM on March 16, 2011
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Holding the property in an LLC or other corporate entity will, to some extent, shield your personal assets from claims made against the corporation.
posted by dfriedman at 6:06 AM on March 16, 2011