Does anyone know if it is possible to carry title of a FHA purchased Multifamily property in the name of an LLC. The bank and FHA are both telling me no, but I am sure there is a way that you can do this, because an LLC helps protect you against liabilities, as well as giving you tax advantages.
Your reasoning is flawed. First, an LLC provides no tax benefits that are not already available to people who hold title in their own name. Second, LLCs are business entities used to conduct business. They are not some magic force field, even though they provide protection when used appropriately and correctly. Third, government programs can restrict their programs however they want and banks can restrict loans however they want as long as they do not violate fair housing laws. You have your answer from the FHA and the bank.
I have seen a number of FHA financed properties that were re-titled in name of an LLC or trust or new owner, after financing was completed.
Just understand that while, at this time, banks just aren’t really concerned about or worried about their loans being “taken over” by a new entity or new buyer, so long as they’re being paid as agreed, its DOS clause COULD BE exercised and the loan called if and as the bank chooses to do it.
I recently got a new HM loan for 2 buyers who were in process of buying from long-time owner (2 houses on lot with room for building another unit or two) and at (totally clue-less) escrow co’s poor advice, they tried to get “formal” permission from O’s bank to assume his loan and told no by the bank.
At my suggestion they went back to the seller and made a new deal with him…he’d give a deed on the property to his own LLC, then sell them a percentage of the LLC’s units…then, over time, sell them the remainder of the LLC’s units.
This was done, and bank is not at all upset that this was done and that now the O’s LLC is the owner, having bought the property “subject to” O’s loan.
Most lenders will require you to take title in your personal name. You can change it after closing–look into putting the property in a trust.
As a general rule, the LLC is tax neutral. In other words, you get the same tax advantages of investment property ownership with the LLC that you have if you hold the property in your own name.
Dave - may I ask you a question? First let me give you two scenarios:
Scenario 1 - you decide you want to invest in Real Estate. You start driving around the neighborhoods trying to find distressed properties, buys printer supplies, print letters/postcards and send them to the owners of those properties. You keep doing this but does not close any deal in your first year.
Scenario 2 - you decide you want to invest in Real Estate. You create an LLC with that objective. Than you do the same, drive the neighborhoods, mail letters/postcards, etc, etc… You also don’t buy any property in your first year.
I would say that in scenario 1, you can’t deduct the money you spent on that year’s return. In scenario 2, you could. Am I right?
In the above situation, you would be better off opening an LLC. Wouldn’t you?
Thank you.
Jose,
A lot of that would depend on your state’s fees for an LLC. In IL, it’s about $250/yr just to have one. It’s also about $500 to start one. We have higher fees than most states, but I would factor this and also the extra cost of filing your taxes (if you pay to have them prepared) into whether it would be worth it.
Legitimate business expenses are always deductible.
In the first scenario, you are operating your business in your own name (you are a sole proprietor) without an LLC. Maybe you decide to register a DBA with your state and operate as a sole proprietor under a ficticious business name. All your business income and expenses are reported on Schedule C of your 1040.
In the second scenario, you decide to establish a single member LLC and operate under your business name. All your business income and expenses are STILL reported on Schedule C of your 1040.
As I said, the LLC is tax neutral. You get the same legitimate business deductions with or without the LLC. Consult your CPA if you need further clarification or need to address specific details.
Justin - absolutelly. I agree that you need to factor the LLC costs. In AZ they are not significant.
Dave - I hear you. And I am sure you are correct. But I would still not feel comfortable about deducting business expenses in scenario 1. I believe it would be hard to justify to the IRS that I was really running a business in that scenario. If I open the LLC, I believe the fact that I registered the company would be a very strong support to my claim that I am starting a business. I do recognize that eventually the business would need to generate a profit, otherwise the IRS might consider it a hobby. However I am thinking about that first year when all you had was marketing expenses, home office expenses, etc… and no revenue. The company would help you demonstrate you are starting the business…
If you are a sole proprietor, you are operating a business. If you feel that you need a company name, then register your company name as a DBA. If the IRS “hobby vs business” issue concerns you, then you prove that you are conducting a business by conducting your business affairs as a business should.
I do recognize that eventually the business would need to generate a profit, otherwise the IRS might consider it a hobby.
Actually, the business only needs to show an INTENT to generate a profit. The business never has to generate a profit to prove that it is a business and not a hobby. Without the intent to generate a profit, you have a hobby.
Just how I see it.
Dave - thank you. I did go the LLC route. Thank you for the clarification on the hobby vs business topic. I did check it out and your statement is accurate. Thank you.