LLC for one rental property?

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cdu7
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LLC for one rental property?

Post by cdu7 » Sun Aug 26, 2018 8:05 am

So, after buying a new house we are emabarking on the journey of renting our old townhome. I’ve run the numbers and it makes sense financially given current rents. That said our real estate attorney at closing told us we should form an LLC to put the property into. Is this really needed? Can’t sufficient umbrella/liability cover in the event of a lawsuit? That said aren’t there big time tax benefits for LLC for real estate in the new tax bill?

Basically anyone who has an LLC is it worth it for one rental property?

riverguy
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Re: LLC for one rental property?

Post by riverguy » Sun Aug 26, 2018 8:34 am

No it’s not worth it and does not need to be in an llc to receive the tax benefits.

dpm321
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Re: LLC for one rental property?

Post by dpm321 » Sun Aug 26, 2018 9:38 am

The use of LLCs for rental property is not fundamentally for tax purposes. The new real estate tax laws will apply to rental property owned by individuals. The primary purpose of the LLC is liability protection. That said, depending upon which state the LLC is registered, it may be bypassed in a lawsuit.

pindevil
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Re: LLC for one rental property?

Post by pindevil » Sun Aug 26, 2018 10:11 am

Not worth it.

You will want to convert your homeowner's insurance to a dwelling/ landlord policy. Require the tenants to purchase their own renters insurance. Buy umbrella insurance.

What tax benefits are you wanting to take advantage of? Be sure to read IRS pub 925 regarding income limits and deducting losses on rentals.

Nissanzx1
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Re: LLC for one rental property?

Post by Nissanzx1 » Sun Aug 26, 2018 10:14 am

I suppose to some extent it depends on if you have money or not. If you have wealth, I would consider an LLC. If not, there isn't a compelling case for the expense.

alwayshedge
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Re: LLC for one rental property?

Post by alwayshedge » Sun Aug 26, 2018 10:17 am

I feel like asking your lawyer if you need an LLC is like asking your barber if you need a haircut. Of course, every situation is different. But most of the time, it's not needed and adds extra headaches.

I have a friend that owns quite a few rental properties with each having a unique LLC. I think it makes him feel powerful, like he owns a bunch of businesses.

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ResearchMed
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Re: LLC for one rental property?

Post by ResearchMed » Sun Aug 26, 2018 10:17 am

cdu7 wrote:
Sun Aug 26, 2018 8:05 am
So, after buying a new house we are emabarking on the journey of renting our old townhome. I’ve run the numbers and it makes sense financially given current rents. That said our real estate attorney at closing told us we should form an LLC to put the property into. Is this really needed? Can’t sufficient umbrella/liability cover in the event of a lawsuit? That said aren’t there big time tax benefits for LLC for real estate in the new tax bill?

Basically anyone who has an LLC is it worth it for one rental property?
Do you have a mortgage or HELOC/etc. on the old townhouse?

RM
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billthecat
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Re: LLC for one rental property?

Post by billthecat » Sun Aug 26, 2018 10:19 am

cdu7 wrote:
Sun Aug 26, 2018 8:05 am
So, after buying a new house we are emabarking on the journey of renting our old townhome. I’ve run the numbers and it makes sense financially given current rents. That said our real estate attorney at closing told us we should form an LLC to put the property into. Is this really needed? Can’t sufficient umbrella/liability cover in the event of a lawsuit? That said aren’t there big time tax benefits for LLC for real estate in the new tax bill?

Basically anyone who has an LLC is it worth it for one rental property?
You’re managing it yourself? You are still liable for your own actions. A better strategy may be to just get gobs of insurance.
We cannot direct the winds but we can adjust our sails.

Cycle
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Re: LLC for one rental property?

Post by Cycle » Sun Aug 26, 2018 10:20 am

No, not worth the cost. Also, lawyers would just say u are sole proprietors anyways. We have just 1 rental unit (other half of duplex). We do use avail tho which is is Handy for lease signing and online rent collection.

We do $2MM umbrella which covers our net worth and u typically won't be sued for more than your net worth.
Never look back unless you are planning to go that way

Sasquatch
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Re: LLC for one rental property?

Post by Sasquatch » Sun Aug 26, 2018 12:43 pm

We decided against a LLC. I wanted to keep the step up in basis option. I doubled my umbrella policy instead.

informal guide
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Re: LLC for one rental property?

Post by informal guide » Sun Aug 26, 2018 12:49 pm

I learned that in PA, retitling an existing rental property into an LLC would subject the transaction to a transfer tax - -very expensive!

Topic Author
cdu7
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Re: LLC for one rental property?

Post by cdu7 » Sun Aug 26, 2018 2:37 pm

Thanks everyone, sounds like it’s more trouble than it’s worth!

afan
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Re: LLC for one rental property?

Post by afan » Sun Aug 26, 2018 4:27 pm

Well, it sounds like it depends on your state law.
How much liability risk you are taking by renting out this property.
How well your state protects a single member LLC.
How much it costs to establish and maintain the LLC.
Whether you can simply fold your protection into your current umbrella policy or you need a new policy for the rental.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

AZAttorney11
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Re: LLC for one rental property?

Post by AZAttorney11 » Sun Aug 26, 2018 4:57 pm

cdu7 wrote:
Sun Aug 26, 2018 8:05 am
So, after buying a new house we are emabarking on the journey of renting our old townhome. I’ve run the numbers and it makes sense financially given current rents. That said our real estate attorney at closing told us we should form an LLC to put the property into. Is this really needed? Can’t sufficient umbrella/liability cover in the event of a lawsuit? That said aren’t there big time tax benefits for LLC for real estate in the new tax bill?

Basically anyone who has an LLC is it worth it for one rental property?
What did your attorney say when you asked him about the pros and cons of this approach?

Amy2017
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Re: LLC for one rental property?

Post by Amy2017 » Sun Aug 26, 2018 5:40 pm

Sasquatch wrote:
Sun Aug 26, 2018 12:43 pm
We decided against a LLC. I wanted to keep the step up in basis option. I doubled my umbrella policy instead.
It cause very little in our state to have a LLC. I don't think having a LLC will take away the step up in basis option. We have several rental properties under LLC and several under our own names. We initially created the LLC for liability protection purpose. However, we learned and later confirmed by our attorney that umbrella insurance gives much better protection. Another advantage of LLC that I think is more important is that it gives your rental business a professional appearance, which usually attracts the best tenants. We don't usually tell potential tenants we are owners. Instead we always tell them we are property managers. When we don't want to approve something or something bad happened, we could always blame the "owner". :D So the relationship between the tenant and property manager does not get deteriorated. Of course tenants could always find out if they are really curious, but in my experience, tenants usually have much more important things to do. Some of them, after living there for several years, did find out that we are actually the owners. But those tenants are usually the good ones that we don't mind them knowing anyway.

Kennedy
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Re: LLC for one rental property?

Post by Kennedy » Sun Aug 26, 2018 6:11 pm

A change in title to an LLC will void your title insurance.

Sasquatch
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Re: LLC for one rental property?

Post by Sasquatch » Sun Aug 26, 2018 7:32 pm

Amy2017 wrote:
Sun Aug 26, 2018 5:40 pm
Sasquatch wrote:
Sun Aug 26, 2018 12:43 pm
We decided against a LLC. I wanted to keep the step up in basis option. I doubled my umbrella policy instead.
It cause very little in our state to have a LLC. I don't think having a LLC will take away the step up in basis option. We have several rental properties under LLC and several under our own names. We initially created the LLC for liability protection purpose. However, we learned and later confirmed by our attorney that umbrella insurance gives much better protection. Another advantage of LLC that I think is more important is that it gives your rental business a professional appearance, which usually attracts the best tenants. We don't usually tell potential tenants we are owners. Instead we always tell them we are property managers. When we don't want to approve something or something bad happened, we could always blame the "owner". :D So the relationship between the tenant and property manager does not get deteriorated. Of course tenants could always find out if they are really curious, but in my experience, tenants usually have much more important things to do. Some of them, after living there for several years, did find out that we are actually the owners. But those tenants are usually the good ones that we don't mind them knowing anyway.
Hmmm, Thanks for the heads up. I will have to ask again. I am in Oregon and my real eastate attorney, trust attorney, and CPA all told me that. I wanted to keep the step up upon my death because the basis is so low.

NoHeat
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Re: LLC for one rental property?

Post by NoHeat » Sun Aug 26, 2018 10:30 pm

Cycle wrote:
Sun Aug 26, 2018 10:20 am
u typically won't be sued for more than your net worth.
And how will that work, exactly?

Dottie57
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Re: LLC for one rental property?

Post by Dottie57 » Sun Aug 26, 2018 10:37 pm

Sasquatch wrote:
Sun Aug 26, 2018 12:43 pm
We decided against a LLC. I wanted to keep the step up in basis option. I doubled my umbrella policy instead.
My umbrella policy does not cover business. Are you sure yours does?

Sasquatch
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Re: LLC for one rental property?

Post by Sasquatch » Sun Aug 26, 2018 10:54 pm

Dottie57 wrote:
Sun Aug 26, 2018 10:37 pm
Sasquatch wrote:
Sun Aug 26, 2018 12:43 pm
We decided against a LLC. I wanted to keep the step up in basis option. I doubled my umbrella policy instead.
My umbrella policy does not cover business. Are you sure yours does?
Certainly worth checking again. Just went by what my agent told me. Thanks Dottie

boglerdude
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Re: LLC for one rental property?

Post by boglerdude » Mon Aug 27, 2018 1:14 am

Everything has to be in the LLC name including the mortgage and a commercial umbrella

Ask your lawyer for the real examples of a single-unit LLC saving a landlord. And let us know...

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ResearchMed
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Re: LLC for one rental property?

Post by ResearchMed » Mon Aug 27, 2018 5:11 am

boglerdude wrote:
Mon Aug 27, 2018 1:14 am
Everything has to be in the LLC name including the mortgage and a commercial umbrella

Ask your lawyer for the real examples of a single-unit LLC saving a landlord. And let us know...
This ^^ - which is why I asked up at the top IF OP had a mortgage on the current (to be rented) house.

IF so, there's no point in doing anything like an LLC, as you are automatically involved *personally*, and that "links" YOU (OP) to the entire rental endeavor.
The goal of an LLC is to keep the entire rental totally separate from your personal holdings, with no commingling of bank accounts, credit cards, etc.

And then, if personal mortgage or not, yes, *commercial/business" rental type "homeowner's" insurance AND umbrella policies.
There are (or can be) very different liability issues, as but one example. Your personal policies are unlikely to cover a business usage.

And separate charge cards.
Elsewhere (different thread I think) it was mentioned that *business* charge cards have more risk. So be it, unless you want to start charging "stuff" to a personal card, and ... then you've commingled your personal self and the business.

None of this will matter if you (OP) are never sued, and one hopes that will be the case. But one has liability insurance "just in case" one *is* sued... (also, "to do the right thing", and cover costs if someone else is hurt due to your negligence, etc.).

IF it ever comes to pass that OP is sued, you can bet that if it is a very large claim, they'll be trying to go after everything possible. The entire point of an LLC is to keep personal holdings out of reach.

NOTE: As someone mentioned (and we've mentioned but I don't think in this thread), we also used an LLC name (and real business entities) to "look professional". The only "problem" was that it wasn't judgement-proof, because when we started out (vacation rental cabins), we had no way to take out mortgages in the name of the LLC, which had no credit history... and no history at all!
So we took out larger commercial umbrella policies.

That is now in the past (it interfered with our increased travel :wink: ), and there was never any hint of a claim, or need for it. But during the multi-year endeavor, it was definitely a SWAN thing (Sleep Well At Night), with the increased commercial umbrella coverage.

RM
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J295
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Re: LLC for one rental property?

Post by J295 » Mon Aug 27, 2018 7:23 am

OP. You understand that without an LLC your personal assets are at risk in the event you have liability arising from the rental that is in excess of your insurance coverage, or is not covered by your liability policy or policies ( if you have a unique set of facts that result in liability, perhaps it will not be covered under your policies of insurance —- if you have a large liability claim you wouldn’t be the first person to have an insurance company deny coverage or defend under a reservation of rights).

Statiscally I’m going to guess, you may be fine with no problems… But maybe you’re the one with some obscure event that results in personal liability with no LLC… It’s a risk you have to be willing to assume with no LLC

We have chosen not to own real estate other than our home as it’s just not something that interests us. However, other business ventures we have are in an LLC, and family members owning real estate put them in LLCs.

Also, as for title insurance, around here title transfer can be handled by an endorsement, which is 75- $100.

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Smorgasbord
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Re: LLC for one rental property?

Post by Smorgasbord » Mon Aug 27, 2018 7:34 am

The annual cost of an Oregon LLC is $100, so I would probably skip it. My answer would be different if you were in a state where the annual cost was $10 and a quick filing.

While it's foolish to think that a single member LLC by itself is going to save you, if someone is coming after your assets then you'll want as many roadblocks/speed bumps in their way as possible.

T4REngineer
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Re: LLC for one rental property?

Post by T4REngineer » Mon Aug 27, 2018 7:50 am

J295 wrote:
Mon Aug 27, 2018 7:23 am
OP. You understand that without an LLC your personal assets are at risk in the event you have liability arising from the rental that is in excess of your insurance coverage, or is not covered by your liability policy or policies ( if you have a unique set of facts that result in liability, perhaps it will not be covered under your policies of insurance —- if you have a large liability claim you wouldn’t be the first person to have an insurance company deny coverage or defend under a reservation of rights).

Statiscally I’m going to guess, you may be fine with no problems… But maybe you’re the one with some obscure event that results in personal liability with no LLC… It’s a risk you have to be willing to assume with no LLC

We have chosen not to own real estate other than our home as it’s just not something that interests us. However, other business ventures we have are in an LLC, and family members owning real estate put them in LLCs.

Also, as for title insurance, around here title transfer can be handled by an endorsement, which is 75- $100.
I have been dabbling in the research arena around buying a rental and the biggest "debate" seems to be is there truly a corporate veil around an LLC that protects your personal assets. I am sure it varies case by case and state by state but many argue that even if you are religious with separation (Even initial funding....which I am not sure how you can get around) that the protection offered by an LCC does not actually exist and it only serves to drive up insurance and mortgage costs if taken out in the name of the LLC vs. personal. Others mention (like you) that not using an LLC and just trusting insurance is a recipe for disaster.

If anyone has good forum/websites that discuss this in detail I would enjoy the link

Tal-
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Re: LLC for one rental property?

Post by Tal- » Mon Aug 27, 2018 8:38 am

T4REngineer wrote:
Mon Aug 27, 2018 7:50 am
J295 wrote:
Mon Aug 27, 2018 7:23 am
OP. You understand that without an LLC your personal assets are at risk in the event you have liability arising from the rental that is in excess of your insurance coverage, or is not covered by your liability policy or policies ( if you have a unique set of facts that result in liability, perhaps it will not be covered under your policies of insurance —- if you have a large liability claim you wouldn’t be the first person to have an insurance company deny coverage or defend under a reservation of rights).

Statiscally I’m going to guess, you may be fine with no problems… But maybe you’re the one with some obscure event that results in personal liability with no LLC… It’s a risk you have to be willing to assume with no LLC

We have chosen not to own real estate other than our home as it’s just not something that interests us. However, other business ventures we have are in an LLC, and family members owning real estate put them in LLCs.

Also, as for title insurance, around here title transfer can be handled by an endorsement, which is 75- $100.
I have been dabbling in the research arena around buying a rental and the biggest "debate" seems to be is there truly a corporate veil around an LLC that protects your personal assets. I am sure it varies case by case and state by state but many argue that even if you are religious with separation (Even initial funding....which I am not sure how you can get around) that the protection offered by an LCC does not actually exist and it only serves to drive up insurance and mortgage costs if taken out in the name of the LLC vs. personal. Others mention (like you) that not using an LLC and just trusting insurance is a recipe for disaster.

If anyone has good forum/websites that discuss this in detail I would enjoy the link
I don't have a single good resource, but I've done a bit of research on the topic as well. Here's my take:

An attack can pierce the LLC veil, and come after personal assets, if that attack can establish that an LLC did not meet the requirements of an LLC. These requirements differ by state, but typically, and LLC must have an established structure (e.g. bylaws), ongoing management (annual meetings with minutes), and separation (no commingling of funds). If these are not true, and you can't show had these, an attack can say that the LLC is invalid, and can go after personal assets.

Suffice to say, simply buying an LLC and moving your property to an LLC does not create an impenetrable vial.
Debt is to personal finance as a knife is to cooking.

Amy2017
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Re: LLC for one rental property?

Post by Amy2017 » Mon Aug 27, 2018 8:57 am

Sasquatch wrote:
Sun Aug 26, 2018 7:32 pm
Amy2017 wrote:
Sun Aug 26, 2018 5:40 pm
Sasquatch wrote:
Sun Aug 26, 2018 12:43 pm
We decided against a LLC. I wanted to keep the step up in basis option. I doubled my umbrella policy instead.
It cause very little in our state to have a LLC. I don't think having a LLC will take away the step up in basis option. We have several rental properties under LLC and several under our own names. We initially created the LLC for liability protection purpose. However, we learned and later confirmed by our attorney that umbrella insurance gives much better protection.
Hmmm, Thanks for the heads up. I will have to ask again. I am in Oregon and my real eastate attorney, trust attorney, and CPA all told me that. I wanted to keep the step up upon my death because the basis is so low.
I sent an email to my estate attorney asking for clarification about the step up in basis option. Here is his response.

"You get the step up for all assets included in your taxable estate for estate tax purposes. Generally this means the step up is given to all assets you own at your death and assets your own in trust where the trust is not structured to avoid estate taxation.

Now to your specific question. If you own real estate in your name at death, you get the step-up. If you own real estate in an LLC, the LLC interest gets a step up. If the LLC is a single member (owner) LLC, then the LLC is treated like a sole proprietorship and therefore has no separate tax existence, so the step up applies to the single member LLC assets. However, a multi-member (multi-owner) LLC is a partnership for tax purposes unless a special election was made at or near the time it was created to be treated as a corporation. Assuming the special election was not made to treat it as a corporation, then a particular election is needed at death to have the LLC interest step-up pass through to the LLC's assets. Bottom line is that the step up is still available but a multi-member LLC requires more work/steps after death to get this accomplished. "

afan
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Re: LLC for one rental property?

Post by afan » Mon Aug 27, 2018 12:38 pm

As best I can tell, the protection of a single member LLC depends on state law. In my state, creditor friendly, single member LLCs are treated as the member's personal property- no protection. To have any protection with a non-single member LLC it is critical to run it as a business in form and substance, with full formalities. Board meetings with minutes, even if the "board" is just a married couple. Separate bank accounts, accounting and so forth. Our lawyer said that an LLC could help with liability in our state, provided it really was a business and looked for all the world like one. For a single piece of property, only sometimes rented, it was not worth it. So we go with insurance and hope for a low likelihood of suit.

In a different state or with different circumstances it could be worth the LLC.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

smackboy1
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Re: LLC for one rental property?

Post by smackboy1 » Mon Aug 27, 2018 5:07 pm

cdu7 wrote:
Sun Aug 26, 2018 8:05 am
That said our real estate attorney at closing told us we should form an LLC to put the property into. Is this really needed? Can’t sufficient umbrella/liability cover in the event of a lawsuit?
It depends on state law and also your financial situation e.g. single member LLC may not offer any liability protection in some states. Typically an LLC or LP is used to own RE to isolate it and other investments from liability. Insurance is important, but it does not cover all liabilities e.g. a payment dispute with a contractor. There are 2 kinds of liability to consider:

Liability originating with the property e.g. contractor lawsuit. Protection from creditors from reaching the LLC members' other assets by limiting recovery to only the LLC's assets.

Liability unrelated to the property e.g. unpaid debt from another venture. Protection from creditors attaching the property to pay off an unrelated judgment i.e. the LLC is functioning as a charging order protection entity (COPE).
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.

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