Answer a question about managing inherited property

July 8, 2015 12:06 AM

My family has inherited a piece of property that generates income. Whereas the property once had a single owner, now it's split among myself and two or three other people. Some questions inside about how to manage/title things--most importantly, how do I title a bank account for this?

I've been working with a lawyer and accountant and the actual property title has been changed and we've taken care of all the necessary registrations with the city. (The title is now split between us in our respective shares.) However, there are a few logistical things I don't really understand how to do.

The main one has to do with how to maintain a bank account for the property, now that we have several owners for it. Obviously, we need such an account to deposit rental income and pay for basic expenses. The bank says that we can have several names on the account, but that one person will have to pay for the income tax for all the rental income, which seems bad. It seems like it might be possible to fix this via an accountant when we need to report at the end of the year. We also have other basic issues that come up with having multiple owners: for example, filling out forms for the city can sometimes be a little confusing. Also, when we want to receive rental checks, who would it be made out to--any one of us?

I've been a little surprised how confusing this has been. I'm actually a (non-practicing) lawyer and I've consulted my bank, accountant and lawyer about this and they haven't necessarily been much help. My bank said most of their clients incorporate as a business entity, but my accountant advised against it, saying it would be expensive to form and require an extra tax filing every year. I'm sure this must be a not uncommon problem. Anyone have advice?

[I'm asking anonymously, because these business/family dealings are pretty private...]

posted by anonymous to Work & Money (10 answers total)

I live in a building that is owned by a man and his mother. They have an LLC that owns the actual building, and they each have shares in the LLC. That really seems like the most straightforward option to this non-expert. NB: he is an accountant himself, so he can do the filings in his sleep.
posted by feckless fecal fear mongering at 1:14 AM on July 8, 2015 [3 favorites]

If the lawyer you consulted wasn't much help on this rather simple scenario, find another, more qualified lawyer.
posted by megatherium at 4:37 AM on July 8, 2015 [5 favorites]

Income property is almost universally owned by an LLC or similar entity, for administrative reasons but more importantly to insulate the individual owners from liability. The issue is much bigger than the title on the bank account. The title on the bank account will be the name of the LLC. The LLC should not be expensive (depending on what you call "expensive") to form, and any expense will be worth it because it's the best way for a group of individuals to own income property.

The bank says that we can have several names on the account, but that one person will have to pay for the income tax for all the rental income, which seems bad.

I've been a little surprised how confusing this has been.

Your question itself is confusing. You should not be asking or accepting tax advice from your bank.

As Megatherium said, you need better advisers.

now it's split among myself and two or three other people. How is it that you don't know how many owners there are?
posted by JimN2TAW at 4:54 AM on July 8, 2015

Seconding (or thirding) an LLC. I formed one in Indiana for less than $100. Just a quick filing with the Secretary of State, and the a phone call to the IRS to get a Taxpayer ID number for the LLC. Fairly simple.
posted by pjern at 5:40 AM on July 8, 2015

Yep, LLC (or LLP) is your answer here. This is exactly what my sibling and I did when we were in your situation. You have to do some extra tax paperwork, but any income ends up being divided per the terms of the LLC and applied to individual taxes.
posted by jferg at 6:05 AM on July 8, 2015

Incidentally, the bare-minimum LLC filing (setting things up with the state) is usually pretty cheap, maybe a couple hundred bucks. Lawyers often inflate that to thousands with fancy leather-bound meeting minutes books and so forth. You probably don't need that BS, but you may need a good operating agreement, which describes how the members in your LLC want things to work, as opposed to the state defaults you get if you just file the minimum paperwork.

Hire a lawyer who explains (in a way you can understand) why an LLC is probably right for you, and asks you questions about how you want things to work. (For example, what are the ownership shares? How will you allocate income & expenses? How will you make decisions about property maintenance & improvement? What if one member wants to sell his share? Etc.)
posted by spacewrench at 6:37 AM on July 8, 2015 [2 favorites]

I have one of these that I own with my sister. An accountant can help you set up an LLC and tell you what your options are for how the money does or does not come to you and how the taxes will work. It's then very easy to have checks made out to the LLC or any one of you could get checks made out to any of you put into the joint bank account. If you don't have an accountant who can talk you through this in simple terms you may need a new accountant. The googleable term here is "Real Estate LLC" and while I suggest a trained professional you can do some reading to figure out what questions you want to ask them.

How is it that you don't know how many owners there are?

My assumption is that there is a married couple who may own a single "share"
posted by jessamyn at 7:46 AM on July 8, 2015

As you are anonymous, it is hard to tell your jurisdiction, but assuming you are in the US, you definitely want to be in an LLC (or other appropriate entity for your state). In addition to shielding you from liability mentioned above, it protects you in different ways.

First, with the bank, anyone with their name on an account can wipe out the account. Or worse, that person's creditors can do it. If the bank account is in a company name, then they have to be authorized to access the funds, or a creditor of the LLC.

Second, the LLC agreement will spell out all the details now, before you have to pave the parking lot, install new water heaters, fix the roof or air conditioning. If the money is needed, what happens when you go around with your hat in hand? How much is everyone obligated to pay? Who can authorize repairs? How are these decisions made? Can you and your brother bind your sister into paying $25,000 because the operating account is low? Solve thse problems before they are problems.

Third, in some states (like California), you have the right to partition property. For example, if your brother decides he no longer likes being a landlord, and wants to cash out, he has the right to petition the court to split up the Property. If the Property is no longer owned by you each individually, then the split is of the LLC interest (and governed by the LLC Agreement), not the property, saving (potentially) tens of thousands in legal fees.

Using an LLC to separate your personal life from your business life is why they have LLCs. Formation is simple, and the taxes are a business expense, to be paid out of the business.

IAAL, IANYL, TINLA. Many affirmative statements above have grey areas which may or may not apply, and should not be relied upon as steadfast rules, but as guidelines in the answering of the question posed.
posted by China Grover at 8:58 AM on July 8, 2015 [1 favorite]

I would consider, aside from all the good advice above, getting a new accountant, because one who doesn't want to deal with a very simple task, despite the fact that you are paying them to do so, is not a good accountant for someone whose finances have just become more complicated, no matter what management path you choose.
posted by poffin boffin at 10:17 AM on July 8, 2015 [3 favorites]

nthing getting a new accountant, and nthing forming an LLC. That is the simplest way to handle it. You get a bank account for the LLC, checks are made out to the LLC, you pay expenses out of that account, and after the LLC files its taxes any income for the individual members is reported to them for their own personal taxes. This is very common and your accountant is either extremely lazy, incompetent, or both.
posted by bedhead at 12:05 PM on July 8, 2015 [1 favorite]