New LLC for Rentals Complete - Deed Transfer Issues?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
User avatar
Meg77
Posts: 2420
Joined: Fri May 22, 2009 1:09 pm
Location: Dallas, TX
Contact:

New LLC for Rentals Complete - Deed Transfer Issues?

Post by Meg77 » Thu Aug 08, 2013 2:45 pm

I own 5 rental properties which I purchased as an individual (the mortgages and deeds are all held in my personal name). I finally set up an LLC into which I plan to move these properties. I did this primarily to prepare for marriage (i.e. to keep these assets separate property), not because I'm particularly worried about creditors or tenants' lawsuits.

I am meeting with a title attorney on Friday to discuss the cost and method for transferring the deeds to the new entity, but I have a concern which neither my title guy, attorney, nor banker seem to be able to fully address. What will my lenders do, if anything, when I transfer the deeds? I can't transfer the mortgages because the promissory notes are between myself and the bank. And technically a deed transfer could trigger the "due on sale" clause in my mortgage agreements. But even my experienced banker has told me she's never seen this actually happen and doesn't think the bank will even notice the transfer as long as I keep making payments on time.

However I escrow the tax/ins on the rental mortgages so if it's possible that a red flag could go up when the tax bills come in to the lender with a different owner name than what is on the mortgage. If their software is even set up to catch that, my advisors still think its unlikely they'd call the note (though they may force me to change the deed back or refinance the loan directly to the LLC), but there is really no way to know I suppose.

Anybody have any experience with this situation? Two of my loans are with Wells Fargo and two more are with another fairly large regional bank based in Texas.

PS in case it matters, I live in Texas and it's a Texas LLC.
"An investment in knowledge pays the best interest." - Benjamin Franklin

niceguy7376
Posts: 2172
Joined: Wed Jul 10, 2013 2:59 pm
Location: Metro ATL

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by niceguy7376 » Thu Aug 08, 2013 3:40 pm

I have one rental property that I bought in 2009 and I am now registering a LLC in GA(my home state) over the weekend and start to setup a bank account and pay monthly mortgage from that account and ask the property mgmt company to deposit into that account. I have not yet thought about deeds and such.
The reason I was planning to do this is to maximise the deductions of this property as LLC instead of K1 that is currently happening, as per my CPA.
So I would be interested to know more about this process.

User avatar
Meg77
Posts: 2420
Joined: Fri May 22, 2009 1:09 pm
Location: Dallas, TX
Contact:

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by Meg77 » Thu Aug 08, 2013 4:23 pm

niceguy7376 wrote:I have one rental property that I bought in 2009 and I am now registering a LLC in GA(my home state) over the weekend and start to setup a bank account and pay monthly mortgage from that account and ask the property mgmt company to deposit into that account. I have not yet thought about deeds and such.
The reason I was planning to do this is to maximise the deductions of this property as LLC instead of K1 that is currently happening, as per my CPA.
So I would be interested to know more about this process.
Hmm, I was thinking that I need to wait to start using the new LLC bank account for income and expenses until the deeds are rolled over. After all if another entity (me) owns the properties then how can a separate entity (the LLC) get the income? You could deposit it directly into the account of course, but it seems like from a tax perspective that would be more of an owner contribution than actual income being earned by the LLC. Although I'm sure many folks do it this way anyway...
"An investment in knowledge pays the best interest." - Benjamin Franklin

bkslainte
Posts: 173
Joined: Tue Aug 21, 2012 6:37 pm

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by bkslainte » Thu Aug 08, 2013 5:11 pm

Here's my vauge experience/reply. This is for a rental in California that is in the name of an LLC.

The property is owned outright and in the name of an LLC. A few months back, I called a regional bank about taking a cash out loan. They replied that I would have to transfer the property out of the LLC and into individuals names and then could transfer it back into the LLC name. So, I'm not sure if this was the loan officer citing the letter of the law or giving me an answer that would allow a loan application(and commission for him) to move forward. In my research on the subject, the general consensus seems to be. Could the bank legally call the mortgage? Yes Does it ever happen? Not really.

If your intent is primarily to keep as separate property, aren't there other ways to accomplish this such as a prenup?

WhyNotUs
Posts: 1359
Joined: Sun Apr 14, 2013 11:38 am

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by WhyNotUs » Thu Aug 08, 2013 5:32 pm

Meg77 wrote:What will my lenders do, if anything, when I transfer the deeds? I can't transfer the mortgages because the promissory notes are between myself and the bank. And technically a deed transfer could trigger the "due on sale" clause in my mortgage agreements. But even my experienced banker has told me she's never seen this actually happen and doesn't think the bank will even notice the transfer as long as I keep making payments on time.
I have not tried this because I did not think it could be done. Why would the bank agree to the transfer? Don't see how you can legally transfer an asset upon which they have primary without their consent.
I own the next hot stock- VTSAX

travellight
Posts: 2781
Joined: Tue Aug 12, 2008 5:52 pm
Location: San Diego

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by travellight » Thu Aug 08, 2013 5:47 pm

I do this all the time, with purchases and refinances. The process goes through in your name and then you quit claim it to the Llc. Never had a problem.

fareastwarriors
Posts: 921
Joined: Tue Feb 14, 2012 12:31 pm

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by fareastwarriors » Thu Aug 08, 2013 5:49 pm

Maybe this is a question for another thred. but is it worth it to have a LLC in California for one or 2 low value properties? Isn't the cost to set up the LLC pretty high in Cali?

SeattleCPA
Posts: 456
Joined: Fri Jul 06, 2012 7:06 pm

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by SeattleCPA » Thu Aug 08, 2013 6:12 pm

I have seen the transfer of a property to an LLC trigger the due on sale clause of your loan. For what it's worth...

Also, it would be unusual for an LLC to create extra tax deduction opportunities. (If you were one of the 3000 people or whatever who downloaded for free my little ebook, "Small Business Tax Deduction Secrets," there's a discussion of this issue near the end of the book.) :beer

WhyNotUs
Posts: 1359
Joined: Sun Apr 14, 2013 11:38 am

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by WhyNotUs » Thu Aug 08, 2013 6:58 pm

travellight wrote:I do this all the time, with purchases and refinances. The process goes through in your name and then you quit claim it to the Llc. Never had a problem.
Do you have a loan? If so, do you tell the note holder?
Why don't you buy it as LLC?
I own the next hot stock- VTSAX

Iorek
Posts: 975
Joined: Fri Mar 08, 2013 9:38 am

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by Iorek » Thu Aug 08, 2013 7:07 pm

WhyNotUs wrote:
travellight wrote:I do this all the time, with purchases and refinances. The process goes through in your name and then you quit claim it to the Llc. Never had a problem.
Do you have a loan? If so, do you tell the note holder?
Why don't you buy it as LLC?
I don't know, but if it's not a cash purchase, I wonder what the process/requirements would be for an LLC to qualify for a mortgage?

WhyNotUs
Posts: 1359
Joined: Sun Apr 14, 2013 11:38 am

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by WhyNotUs » Thu Aug 08, 2013 7:16 pm

Also, do you buy a new title insurance policy since your policy was in your personal name and you are no longer an owner.

Seems like bad faith actions without bank and title company consent. Might work out as long as nothing strange happens.
I own the next hot stock- VTSAX

User avatar
hand
Posts: 1217
Joined: Sun May 17, 2009 8:42 pm

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by hand » Thu Aug 08, 2013 7:38 pm

I've heard the following:
1) It is sometimes possible to reach out to the lender and request OK to transfer to LLC
2) That many lenders have better things to do than to police deed transfers as long as the loan payments keep coming, however if you escrow and change insurance, they will receive notification of new owner as part of the new insurance paperwork.

Obviously if you don't involve the lender, there is a risk of "due on sale" clause being invoked.

You may consider reaching out to your local landlord organization for real life experiences.

travellight
Posts: 2781
Joined: Tue Aug 12, 2008 5:52 pm
Location: San Diego

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by travellight » Thu Aug 08, 2013 7:46 pm

I thought that the bank was a complicit part of the process. In different states and over a 20 years period with all loan applications and all parties involved in the process, this was presented matter of factly as the way it is done.

SRenaeP
Posts: 775
Joined: Tue Jan 19, 2010 9:05 pm

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by SRenaeP » Fri Aug 09, 2013 1:00 pm

Iorek wrote:
WhyNotUs wrote:
travellight wrote:I do this all the time, with purchases and refinances. The process goes through in your name and then you quit claim it to the Llc. Never had a problem.
Do you have a loan? If so, do you tell the note holder?
Why don't you buy it as LLC?
I don't know, but if it's not a cash purchase, I wonder what the process/requirements would be for an LLC to qualify for a mortgage?
I'm going through this right now. Most, if not all, banks won't write a mortgage for an LLC for residential rental property. There are commercial lenders who might but usually not for low dollar residential property. They mostly loan for apartment buildings, commercial property, etc. In addition, those who will loan to an LLC will not loan to an LLC, with little to assets, that was created for the sole purpose of buying rental property.

-Steph

Luke Duke
Posts: 789
Joined: Tue Jun 18, 2013 11:44 am
Location: Texas

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by Luke Duke » Fri Aug 09, 2013 1:21 pm

bkslainte wrote:If your intent is primarily to keep as separate property, aren't there other ways to accomplish this such as a prenup?
He would need his fiance to agree to a prenup. :mrgreen: He can do this on his own. I don't think that this would work for its intended purpose in Texas.

Also for maximum liability protection you would want each rental property to be owned by its own LLC.

YngInvstr
Posts: 22
Joined: Tue Dec 15, 2009 7:28 pm

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by YngInvstr » Fri Aug 09, 2013 1:25 pm

I have several rental homes, owned and mortgaged all within an LLC, maybe I can offer some advice...

From personal experience- you will run into major issues with the mortgage holder trying to accomplish this, this is almost guaranteed.

Lenders will be very unwilling to allow the deed and loan to be transferred over to the LLC, primarily because it takes the liability away from you and puts it into the LLC - which may or may not have assets high enough to cover the debt that was originally taken. Whereas you have personal assets, a job, etc, which is why the bank loaned you $ in the first place.

The only suggestion I can offer, is to see if the bank will allow this transfer, assuming you take on a personal guarantee for the loan. Whereas if the LLC defaults, you will personally be liable for the debt. This is how all of our financed homes are set up. Unless you have SUBSTANTIAL equity in the homes, I doubt any lender will allow the transfer without a personal guarantee. In fact, I don't think any of the mega bank will even let an LLC hold the mortgage.

Also, as someone mentioned, I cannot think of any tax deductions you would be able to take through an LLC (sole or multi-member) that you cannot take through your personal return.

Good luck!

YngInvstr
Posts: 22
Joined: Tue Dec 15, 2009 7:28 pm

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by YngInvstr » Fri Aug 09, 2013 1:29 pm

Luke Duke wrote:
bkslainte wrote:If your intent is primarily to keep as separate property, aren't there other ways to accomplish this such as a prenup?
Also for maximum liability protection you would want each rental property to be owned by its own LLC.
I know a lot of people advocate this, but honestly a good insurance policy is all that is needed. Multi LLCs to hold each home will likely end up costing more $ in administration costs than providing any real benefit.

In fact, LLCs in general do not offer than much protection if you take an active role in management. I know you mentioned having a property management company, but even that can be circumvented to get to your assets should a lawsuit arise.

My advice is to have a solid insurance policy with business liability protection and a personal umbrella policy. In fact, I don't have one but have heard they are available, you can now buy umbrella policies for a business...

ResearchMed
Posts: 7702
Joined: Fri Dec 26, 2008 11:25 pm

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by ResearchMed » Fri Aug 09, 2013 2:05 pm

YngInvstr wrote:
Luke Duke wrote:
bkslainte wrote:If your intent is primarily to keep as separate property, aren't there other ways to accomplish this such as a prenup?
Also for maximum liability protection you would want each rental property to be owned by its own LLC.
I know a lot of people advocate this, but honestly a good insurance policy is all that is needed. Multi LLCs to hold each home will likely end up costing more $ in administration costs than providing any real benefit.

In fact, LLCs in general do not offer than much protection if you take an active role in management. I know you mentioned having a property management company, but even that can be circumvented to get to your assets should a lawsuit arise.

My advice is to have a solid insurance policy with business liability protection and a personal umbrella policy. In fact, I don't have one but have heard they are available, you can now buy umbrella policies for a business...
We encountered just about all of the problems mentioned, and we simply could *not* arrange for the title for any rental properties to be held by the LLC.

We never really tried to get the LLC to finance the purchase, since there just weren't any meaningful assets held by the LLC (except for the equity in the properties). The LLC was just starting up, so there wasn't even any sort of financial history.
(The properties are in a non-recourse state, so it's not really clear why this was so important a distinction, but it didn't matter, because it was quickly obvious that the bank wouldn't lend to the LLC as owner. This was financed through one of the MegaBanks. We considered refinancing later, with a much smaller bank, and they seemed much more open to a variety of possibilities.)

We still *have* the LLC, and use it for all correspondence and, importantly, for paying taxes (sales taxes, etc.) for the business. We also keep all of the LLC expenses/income separate from our personal expenses/income, for tax purposes. (This also makes it easier for us to track everything, of course.)

For the "protection", we have a very high umbrella policy that offers specific coverage for the business purposes. Our main concern was some sort of personal injury, which in catastrophic cases could have catastrophic costs. It wasn't very expensive, through the same insurer providing the regular business property insurance (with a smaller liability ceiling), for the peace of mind.

RM

YngInvstr
Posts: 22
Joined: Tue Dec 15, 2009 7:28 pm

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by YngInvstr » Fri Aug 09, 2013 2:34 pm

ResearchMed wrote:
YngInvstr wrote:
Luke Duke wrote:
bkslainte wrote:If your intent is primarily to keep as separate property, aren't there other ways to accomplish this such as a prenup?
Also for maximum liability protection you would want each rental property to be owned by its own LLC.
I know a lot of people advocate this, but honestly a good insurance policy is all that is needed. Multi LLCs to hold each home will likely end up costing more $ in administration costs than providing any real benefit.

In fact, LLCs in general do not offer than much protection if you take an active role in management. I know you mentioned having a property management company, but even that can be circumvented to get to your assets should a lawsuit arise.

My advice is to have a solid insurance policy with business liability protection and a personal umbrella policy. In fact, I don't have one but have heard they are available, you can now buy umbrella policies for a business...
We encountered just about all of the problems mentioned, and we simply could *not* arrange for the title for any rental properties to be held by the LLC.

We never really tried to get the LLC to finance the purchase, since there just weren't any meaningful assets held by the LLC (except for the equity in the properties). The LLC was just starting up, so there wasn't even any sort of financial history.
(The properties are in a non-recourse state, so it's not really clear why this was so important a distinction, but it didn't matter, because it was quickly obvious that the bank wouldn't lend to the LLC as owner. This was financed through one of the MegaBanks. We considered refinancing later, with a much smaller bank, and they seemed much more open to a variety of possibilities.)

We still *have* the LLC, and use it for all correspondence and, importantly, for paying taxes (sales taxes, etc.) for the business. We also keep all of the LLC expenses/income separate from our personal expenses/income, for tax purposes. (This also makes it easier for us to track everything, of course.)

For the "protection", we have a very high umbrella policy that offers specific coverage for the business purposes. Our main concern was some sort of personal injury, which in catastrophic cases could have catastrophic costs. It wasn't very expensive, through the same insurer providing the regular business property insurance (with a smaller liability ceiling), for the peace of mind.

RM
Just out of curiosity, what sales tax are you paying in the rental business?

I realize you may be in a state that charges sales tax on rental income (FL for example) but just wondering if this is the case.

ResearchMed
Posts: 7702
Joined: Fri Dec 26, 2008 11:25 pm

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by ResearchMed » Fri Aug 09, 2013 2:38 pm

YngInvstr wrote:
ResearchMed wrote:
YngInvstr wrote:
Luke Duke wrote:
bkslainte wrote:If your intent is primarily to keep as separate property, aren't there other ways to accomplish this such as a prenup?
Also for maximum liability protection you would want each rental property to be owned by its own LLC.
I know a lot of people advocate this, but honestly a good insurance policy is all that is needed. Multi LLCs to hold each home will likely end up costing more $ in administration costs than providing any real benefit.

In fact, LLCs in general do not offer than much protection if you take an active role in management. I know you mentioned having a property management company, but even that can be circumvented to get to your assets should a lawsuit arise.

My advice is to have a solid insurance policy with business liability protection and a personal umbrella policy. In fact, I don't have one but have heard they are available, you can now buy umbrella policies for a business...
We encountered just about all of the problems mentioned, and we simply could *not* arrange for the title for any rental properties to be held by the LLC.

We never really tried to get the LLC to finance the purchase, since there just weren't any meaningful assets held by the LLC (except for the equity in the properties). The LLC was just starting up, so there wasn't even any sort of financial history.
(The properties are in a non-recourse state, so it's not really clear why this was so important a distinction, but it didn't matter, because it was quickly obvious that the bank wouldn't lend to the LLC as owner. This was financed through one of the MegaBanks. We considered refinancing later, with a much smaller bank, and they seemed much more open to a variety of possibilities.)

We still *have* the LLC, and use it for all correspondence and, importantly, for paying taxes (sales taxes, etc.) for the business. We also keep all of the LLC expenses/income separate from our personal expenses/income, for tax purposes. (This also makes it easier for us to track everything, of course.)

For the "protection", we have a very high umbrella policy that offers specific coverage for the business purposes. Our main concern was some sort of personal injury, which in catastrophic cases could have catastrophic costs. It wasn't very expensive, through the same insurer providing the regular business property insurance (with a smaller liability ceiling), for the peace of mind.

RM
Just out of curiosity, what sales tax are you paying in the rental business?

I realize you may be in a state that charges sales tax on rental income (FL for example) but just wondering if this is the case.
Yes, sales and lodging taxes, both state and county.
This is for short-term vacation rental property.
Rentals for more than 30 days (or 1 month - I'm forgetting just how it's written, but we haven't yet had any for more than 2 weeks) do not pay these taxes.

RM

User avatar
Meg77
Posts: 2420
Joined: Fri May 22, 2009 1:09 pm
Location: Dallas, TX
Contact:

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by Meg77 » Fri Aug 09, 2013 3:13 pm

Ok here is an update! I had lunch with a title attorney today and he said he can do a quit cliam deed transfer no problem to get all the deeds into the LLC. He has seen lenders catch that before (usually when tax bills come in if you escrow) and then contact the client about it. In one case a lender gave the client 30 days to transfer the deed back or else they threatened to foreclose. In another case the client wrote a letter explaining they were the sole owner of the new entity (in that case a family trust) and the lender acknowledged and agreed to the transfer. In other cases then lender never notices (or if they do they don't say anything).

Worst case I can always just transfer the deeds back if/when individual lenders reach out to me. Or maybe I can explain that the LLC is a single member entity that is disregarded for tax purposes and they will accept the transfer. Or, worst case, I've talked to my banker (a Private Banker who does loans that are held on the bank's books) and she verified that I should qualify for a commercial loan directly to the LLC which could just pay off the other mortgages in question. I'd have to guarantee that loan, and the rate would be higher, and the term would be shorter than what I've got now (30 year fixed mortgages at a weighted average 4.17%), so I don't want to go that route if I can avoid it. But I think it's best to just get all the properties into the LLC one way or another and let the dust settle before I get married.
fareastwarriors wrote:Maybe this is a question for another thred. but is it worth it to have a LLC in California for one or 2 low value properties? Isn't the cost to set up the LLC pretty high in Cali?
The cost to set up is fairly high, and the same liability protection can be obtained with an umbrella insurance policy and/or a high insurance liability policy on the property itself, which is why I've never put my properties into an LLC before now. Also I feared this deed issue. Loans to LLCs are expensive short term commercial loans; mortgages to individuals are cheap, long term and subsidized.
Iorek wrote:
WhyNotUs wrote:
travellight wrote:I do this all the time, with purchases and refinances. The process goes through in your name and then you quit claim it to the Llc. Never had a problem.
Do you have a loan? If so, do you tell the note holder?
Why don't you buy it as LLC?
I don't know, but if it's not a cash purchase, I wonder what the process/requirements would be for an LLC to qualify for a mortgage?
LLCs can get loans from banks, but they can't be sold off to Fannie or Freddie like individual mortgages can; they are held on the bank's books and are usually 3-10 year loans with higher interest rates (4-6% currently) and shorter amortizations (20-25 is preferable for most bankers). The owner has to guarantee the note too. Oh, and there will usually be origination fees of 0.5-1.0%. Not as great a deal, obviously.
Luke Duke wrote:
bkslainte wrote:If your intent is primarily to keep as separate property, aren't there other ways to accomplish this such as a prenup?
He would need his fiance to agree to a prenup. :mrgreen: He can do this on his own. I don't think that this would work for its intended purpose in Texas.

Also for maximum liability protection you would want each rental property to be owned by its own LLC.
For the record I am the female in this relationship! :D I don't need maximum liability protection and I'm not paying to set up and track 6 different LLCs each of which would have one small asset; then I'd have to figure out how to split up expenses and all too and have 6 different checking accounts... :annoyed

Maybe I should petition the bank and see if I can un-escrow my taxes and insurance prior to moving the deeds, since that's how they would likely be alerted anyway. Any fee they'd charge for that would be worth it to avoid the costs of a commercial loan down the road...
"An investment in knowledge pays the best interest." - Benjamin Franklin

neoptolemus412
Posts: 142
Joined: Sun Jul 28, 2013 3:54 pm

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by neoptolemus412 » Fri Aug 09, 2013 6:08 pm

If you have any properties you own outright, it's probably best to place those in an LLC and then move the others over as you pay them off. As mentioned, the majority of banks won't offer LLCs' loans or offer less favorable terms. There are many reasons for this, but the main one is the streamlined process most states have for foreclosures on individual's properties.

I'm sure your mortgages has a 'due on sale' clause, which means they can call the loan even if you quit claim deed it. People get away with this technique because bank are large, slow moving organizations that take time to perform their due diligence on the deeds after the origination of the loan. However, it's a risk that is not worth it b/c the bank can/will call the loan if they want (This is how most real estate investors go broke). Also, if you run into trouble and need to refinance or try to sell the home, the bank can make the situation a living nightmare for you. I wouldn't try to transfer a property with a mortgage into an LLC for these reasons.

Lastly, you infer that your reason for an LLC is to protect the premarital assets. This LLC won't do much for you in that regard. It's a flow through entity; thus, the income flows directly to you as an individual. You'll reap the benefits of the properties well into your marriage. In divorce, your spouse can easily go after your ownership interest in the LLC as communal property. The best way to protect premarital assets is through a pre-nup. If you're concerned about losing your properties in divorce or his risk, then it's best to handle it directly in a legal document rather than gambill an LLC will be sufficient to handle such issues,

Random Poster
Posts: 1681
Joined: Wed Feb 03, 2010 10:17 am

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by Random Poster » Fri Aug 09, 2013 6:22 pm

Meg77 wrote:I own 5 rental properties which I purchased as an individual (the mortgages and deeds are all held in my personal name). I finally set up an LLC into which I plan to move these properties. I did this primarily to prepare for marriage (i.e. to keep these assets separate property), not because I'm particularly worried about creditors or tenants' lawsuits.

I am meeting with a title attorney on Friday to discuss the cost and method for transferring the deeds to the new entity, but I have a concern which neither my title guy, attorney, nor banker seem to be able to fully address. What will my lenders do, if anything, when I transfer the deeds? I can't transfer the mortgages because the promissory notes are between myself and the bank. And technically a deed transfer could trigger the "due on sale" clause in my mortgage agreements. But even my experienced banker has told me she's never seen this actually happen and doesn't think the bank will even notice the transfer as long as I keep making payments on time.

However I escrow the tax/ins on the rental mortgages so if it's possible that a red flag could go up when the tax bills come in to the lender with a different owner name than what is on the mortgage. If their software is even set up to catch that, my advisors still think its unlikely they'd call the note (though they may force me to change the deed back or refinance the loan directly to the LLC), but there is really no way to know I suppose.

Anybody have any experience with this situation? Two of my loans are with Wells Fargo and two more are with another fairly large regional bank based in Texas.

PS in case it matters, I live in Texas and it's a Texas LLC.
In addition to what has previously been stated regarding the LLC as a way (or not) to keep property as separate property, I'm curious how you plan to keep any funds spent on upkeep of the property (and rent earned from the properties, although that one is easier) wholly separate and not commingled with joint marital property.

All in all, the idea seems a bit dubious to me.

BTW, double check on the QCD to the LLC. It may kill your title insurance.

User avatar
Meg77
Posts: 2420
Joined: Fri May 22, 2009 1:09 pm
Location: Dallas, TX
Contact:

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by Meg77 » Sat Aug 10, 2013 3:33 pm

I do know that an LLC is not a perfect way to keep separate property separate. I have owned these properties for years prior to marriage, but there are many ways separate assets can become co-mingled: if we use joint income to keep them up or pay down their mortgages; if he helps physically maintain the properties, if the income from the properties is used jointly of for marital purposes. Even just us jointly paying taxes on the income generated by the LLC (which will flow through to our personal return) makes it not totally separate property anymore.

I plan to avoid all these things to the extent that I am able. The LLC shouldn't generate a positive income for tax purposes for years (what with all the depreciation and a couple of 15 year mortgages that keep cash flow negative on 2 properties). I will fund up the LLC with plenty of cash so that hopefully no future cash contributions to the entity will be necessary (if they are they'll come from a trust I have, another separate asset); any excess income the properties generate will be used to prepay their mortgages rather than being distributed out to me to spend or invest with my husband.

Sure all this could still be contested in a divorce one day, but neither myself nor my fiance is interested in setting up a prenup. I don't even know what I would want to ask for in a prenup. He will likely out-earn me over the next decade (or three) no matter what. Further, I may stay home with kids for a few years - or indefinitely if we have several. We plan to aggressively save and invest together from day one, and those joint assets should outweigh my separate assets in just a few years. He has assets coming into this thing too.

At the end of they day this distinction may be more psychological to me, but it's an important one. I went into this adventure on my own; it was the first major investing I ever did. I learned a lot; they aren't the strongest assets out there, but they are emotionally significant and symbolic to me. I just don't want them all mixed up with my new life. The properties will be rolled into an LLC primarily as a method of keeping them and the cash they use and throw off literally separate from everything else we are doing jointly or as individuals. The records will be distinct and all activity kept separate - so in the event of a divorce it'll at least be easier to see what it's worth and how much it grew after we were married. If all the cash and properties stayed in my own name that would be all but impossible to remember/document over time.
"An investment in knowledge pays the best interest." - Benjamin Franklin

robjer
Posts: 27
Joined: Sat Apr 14, 2012 6:28 pm

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by robjer » Sat Aug 10, 2013 4:03 pm

can you still claim all the deductions of an "Active " owner of these properties after going LLC?
There was a serious difference in the deductions you could take as an Active vs. "Passive" investor.

User avatar
Meg77
Posts: 2420
Joined: Fri May 22, 2009 1:09 pm
Location: Dallas, TX
Contact:

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by Meg77 » Sat Aug 10, 2013 4:17 pm

robjer wrote:can you still claim all the deductions of an "Active " owner of these properties after going LLC?
There was a serious difference in the deductions you could take as an Active vs. "Passive" investor.
No, I don't qualify as an active owner even now. I'm not even close to meeting the number of hours per year spent on them or the percentage of working hours spent on them minimums. So they are passive assets and will remain so. Unless I ever quit my job to stay home as kids and fire the management company perhaps...
"An investment in knowledge pays the best interest." - Benjamin Franklin

jegallup
Posts: 671
Joined: Sat Feb 09, 2008 8:34 pm
Location: San Diego

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by jegallup » Sat Aug 10, 2013 6:34 pm

For what it's worth, California taxes LLCs at a "corporate" rate of 8.84 percent--with an $800 annual minimum, which I think you'd have to pay even if the LLC showed no profit. Here's the link:

https://www.ftb.ca.gov/businesses/bus_s ... pany.shtml

For some reason you can't clipboard off the Franchise Tax Board's site.

Not an attorney but can't really see what protection the LLC provides in the event of a disputed divorce. The LLC owns the properties but you own the LLC, assuming it's a "single member" entity.

Grt2bOutdoors
Posts: 19546
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by Grt2bOutdoors » Sun Aug 11, 2013 1:16 pm

Pre-nup - the least messy way of handling your issue. You both obtain independent counsel in devising the plan. If I were you I'd instruct your attorney to specifically mention that all assets independently owed prior to marriage is not considered marital property. Maintain the ownership of those properties in your name, keep a separate bank account specific to those property issues with you as the owner in name and only authorized signer. As you state, your fiance is coming into the marriage with some assets - in any case, you will both need to disclose fully on the pre-nup agreement what is yours and what is his. Do not ever co-mingle assets, ever. I believe in romance too, but would not bank on "he may likely out earn me, the word "may" is not the same as he is "guaranteed". Should the shine ever wear off down the road, you will thank yourself for having a pre-nup, particularly if you are the one coming in with the vast majority of the assets.

The LLC route and deed transfer is not going to fly with your current lenders, unless you apply for a commercial mortgage for each of the properties - that will result in a higher rate, higher fees, more scrutiny.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

travellight
Posts: 2781
Joined: Tue Aug 12, 2008 5:52 pm
Location: San Diego

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by travellight » Sun Aug 11, 2013 4:12 pm

I agree with gr82b and others. A prenup is your best chance at protection; an LLC won't protect you in this scenario at all, imo. I happen to think a prenup is romantic, and fair. It says "I just want to be with you and am not in it for the money". It keeps it all about the love and romance and takes finances out of the equation.

playtothebeat
Posts: 266
Joined: Thu Jan 24, 2013 12:39 pm
Location: southern california

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by playtothebeat » Sun Aug 11, 2013 5:46 pm

Ok here is an update! I had lunch with a title attorney today and he said he can do a quit cliam deed transfer no problem to get all the deeds into the LLC. He has seen lenders catch that before (usually when tax bills come in if you escrow) and then contact the client about it. In one case a lender gave the client 30 days to transfer the deed back or else they threatened to foreclose. In another case the client wrote a letter explaining they were the sole owner of the new entity (in that case a family trust) and the lender acknowledged and agreed to the transfer. In other cases then lender never notices (or if they do they don't say anything).
That sounds like an awful advice from an attorney. "Go ahead, and i'm sure the bank won't notice, but hey if it does, you can probably get out of it". The only advice I can give is to not follow that advice. Work with your banker, and get a different attorney who understands the process better and can devise a concrete plan that can be executed.

neoptolemus412
Posts: 142
Joined: Sun Jul 28, 2013 3:54 pm

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by neoptolemus412 » Sun Aug 11, 2013 8:28 pm

Meg77 wrote: Sure all this could still be contested in a divorce one day, but neither myself nor my fiance is interested in setting up a prenup. I don't even know what I would want to ask for in a prenup. He will likely out-earn me over the next decade (or three) no matter what. Further, I may stay home with kids for a few years - or indefinitely if we have several. We plan to aggressively save and invest together from day one, and those joint assets should outweigh my separate assets in just a few years. He has assets coming into this thing too.

At the end of they day this distinction may be more psychological to me, but it's an important one. I went into this adventure on my own; it was the first major investing I ever did. I learned a lot; they aren't the strongest assets out there, but they are emotionally significant and symbolic to me. I just don't want them all mixed up with my new life. The properties will be rolled into an LLC primarily as a method of keeping them and the cash they use and throw off literally separate from everything else we are doing jointly or as individuals. The records will be distinct and all activity kept separate - so in the event of a divorce it'll at least be easier to see what it's worth and how much it grew after we were married. If all the cash and properties stayed in my own name that would be all but impossible to remember/document over time.
From my experience, marriage is as much a business transaction as a romantic endeavor. Everyday, I work with people when things go wrong in personal and business relationships. I've had all sorts of clients make irrational, business decisions prior to marriage b/c they don't want to offend their future wife/husband. Relationships are built upon honesty. The most honest thing to do is to tell someone the truth about your fears. You are circumventing the truth through your actions. You want to solely own these properties. Tell your future husband this & make it legal before marriage.

Any tom, dick, or harry attorney who tells you a quit claim deed or multiple LLCs or whatever scheme will protect assets is lying. There is only one way to protect pre-marital assets. Getting a pre-nup. That's it. Marriage is a legal contract that effectively consolidates one's assets with another. States may differ on laws, but you leave yourself open if you have substantial assets and do not protect them before you're married. You will lose substantial time, lose money, increase the complexity of your taxes, and not resolve your issue by entering into an LLC to avert these properties from becoming communal. One sets up an LLC to run a business. One does not do it to avoid bringing properties into a marriage.

nordsteve
Posts: 654
Joined: Sun Oct 05, 2008 9:23 am

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by nordsteve » Sun Aug 11, 2013 10:08 pm

Another reason many people keep income properties out of LLCs is that you must hire an attorney to represent the LLC in court if you have a dispute with a tenant; with it in individual ownership you can represent yourself.

As an individual owner of rental properties, I agree with the others who are advocating for a prenup in your situation. It is the most predictable solution to your problem.

User avatar
Meg77
Posts: 2420
Joined: Fri May 22, 2009 1:09 pm
Location: Dallas, TX
Contact:

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by Meg77 » Mon Aug 12, 2013 4:37 pm

I appreciate all the advice. Again, I know an LLC will not totally protect these assets in a future divorce. It will however serve as a bucket in which to hold and measure and track their values and income over time.

For the record, we have talked at length about our financial goals and concerns, and of course he readily agrees that my properties should stay mine no matter what happens with our relationship down the road. I'm not so naive as to think that people can't change their perspective and become vindictive for any number of reasons, but I can't really see him asking for - or being awarded - my property in a contested divorce anyway, prenup or not. It seems simple to just ask him to sign something to that effect then, I realize. However the bottom line is that I don't WANT to say "what's yours is yours and what's mine is mine." It isn't true and it isn't our intent as a couple. We are JOINING lives, and that includes our financial lives (how could we join lives otherwise without sharing a budget, a retirement plan, short term savings goals, etc.?).

Besides, TX is a community property state where the laws are fairly clear: marital assets accumulated during a marriage are split evenly in case of a divorce and that separate property remains separate (including assets accumulated prior to marriage or inherited during marriage, if kept separate). I am fine with that. That's pretty much what I'd want any prenup to say anyway, and there's no way to get more specific without diving into every possible future scenario and writing different rules for them all. If we ever get divorced there will be plenty of pain to go around, but in almost every possible scenario Ii can think of we will still each end up wealthier than we were when we met due to our aggressive savings and debt repayment plans. We are both professionals with good educations and incomes, good family support (for childcare) and positive net worths coming into this thing. We are going to be great together and - I'm confident - just fine if we ever separate too.
"An investment in knowledge pays the best interest." - Benjamin Franklin

Luke Duke
Posts: 789
Joined: Tue Jun 18, 2013 11:44 am
Location: Texas

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by Luke Duke » Tue Aug 13, 2013 1:30 pm

Meg77 wrote:He will likely out-earn me over the next decade (or three) no matter what. Further, I may stay home with kids for a few years - or indefinitely if we have several. We plan to aggressively save and invest together from day one, and those joint assets should outweigh my separate assets in just a few years. He has assets coming into this thing too.
Is he going through the effort that you are going through to separate his assets from (future) community property?

It sounds like, in the event of a divorce, you want to keep all of your stuff and take half of his.

User avatar
Meg77
Posts: 2420
Joined: Fri May 22, 2009 1:09 pm
Location: Dallas, TX
Contact:

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by Meg77 » Thu Aug 15, 2013 10:15 am

Luke Duke wrote:
Meg77 wrote:He will likely out-earn me over the next decade (or three) no matter what. Further, I may stay home with kids for a few years - or indefinitely if we have several. We plan to aggressively save and invest together from day one, and those joint assets should outweigh my separate assets in just a few years. He has assets coming into this thing too.
Is he going through the effort that you are going through to separate his assets from (future) community property?

It sounds like, in the event of a divorce, you want to keep all of your stuff and take half of his.
There would be no point in him trying to make sure his separate assets stay separate. Even excluding the value of this new LLC/my rental properties, my net worth is still more than 4 times his. We will be treating all our separate assets (brokerage balances, cash, and retirement assets) as joint, and further we'll be focused on aggressively paying down his student loan for the first 2-3 years. I don't really think that the fact that I want to keep the business I established with an inheritance that I received as a child separate no matter what qualifies as "keeping all my stuff" - and it certainly doesn't indicate anything about "taking half of his."

He'll come out ahead financially no matter what if we get divorced. Worst case for him if we split within a few years, we will each leave with what we brought in (plus new contributions to retirement which will be about equal) - except his student loan will be paid off much sooner than he could have done on his own income. Worst case for me the above remains true plus he tries to also take half the growth and income from my (much larger than his) separate property since we got married (besides the rentals I own a fourth of another entity with my siblings). I am the only one at risk of coming out of the marriage worse off than I went into it - and that's even if I DON'T sacrifice my current income and future earning potential to stay home with kids. I am not overly worried about this; it's just a fact of life I have to face if I want to marry somebody who isn't richer than I am. Which I do. Even if the "worst case" happens I don't think I'll ever regret getting married and taking that risk.
"An investment in knowledge pays the best interest." - Benjamin Franklin

Random Poster
Posts: 1681
Joined: Wed Feb 03, 2010 10:17 am

Re: New LLC for Rentals Complete - Deed Transfer Issues?

Post by Random Poster » Thu Aug 15, 2013 11:26 am

Meg77 wrote:Even excluding the value of this new LLC/my rental properties, my net worth is still more than 4 times his.
Interesting statement to make, given your earlier one of:
Meg77 wrote:He has assets coming into this thing too.

Meg77 wrote:We will be treating all our separate assets (brokerage balances, cash, and retirement assets) as joint . . . .
Except that you aren't.
Meg77 wrote:Worst case for him if we split within a few years, we will each leave with what we brought in (plus new contributions to retirement which will be about equal) - except his student loan will be paid off much sooner than he could have done on his own income. Worst case for me the above remains true plus he tries to also take half the growth and income from my (much larger than his) separate property since we got married (besides the rentals I own a fourth of another entity with my siblings).
Maybe, maybe not.

Perhaps you should get some competent legal counsel to advise you (and him, to the extent that he cares about such matters) about what really could happen in the event of a divorce.

Post Reply