Interplay of land trust, LLC, and Federal income taxes...

Next week I’m closing on a SFR here in Texas that I will rent out. The property will be conveyed in my name and my name will be on the mortgage.

I do not yet own, but I intend to buy, other SFRs and small-plexes. I’ll purchase them directly through an LLC I’m setting up (see below).

Here’s what I think I want to do with the property I’ll close on next week:

  1. Form an LLC with myself as manager.
  2. Form a land trust with the LLC as trustee.
  3. Deed my new property to the land trust.

Ostensibly this buys me a certain level of protection vis-a-vis my personal assets and I understand the general structure (I think)…

What I don’t understand is how everthing is going to play with my tax return.

The LLC doesn’t hold the mortgage, so it doesn’t make the payments, I do. The LLC doesn’t carry the casualty insurance, I do.

How does the LLC pay me to pay the mortgage/insurance premiums?

How is all this recorded on my tax return? There has to be a 1065 for the LLC (I think) which would show only income and transfers to me in this case. This is all recorded on Schedule E? :help

I’ve had Schedule C businesses before, but nothing this complex…

This set up offers no protection. The LLC must own the property to shield member assets from business liability. Acting as a member-manager creates a means to bypass the LLC protections.

Thank you for your reply!

How would you suggest I structure this transaction to maximize my protection? My lender will not convey title in the name of my LLC. But, apparently, if my name is on the mortgage even that wouldn’t help.

I realize that the optimal approach would be to purchase the property through my LLC with me as guarantor. Unfortunately, the suddeness of this transaction precludes that. I’m obligated to close in a week…

Buy in land trust directly. If that’s not possible, buy in your own name and then transfer to the land trust after the closing. Such a transfer does not trigger the due on sale clause. Then, you can change the beneficial interest of the trust to the LLC. That triggers the due on sale clause, but it is not public record and the bank will never find out unless they demand to see the trust documents. That won’t happen unless the mortgage isn’t being paid. The only times I have seen the clause triggered, the bank allowed the LLC to assume the loan for a small fee.

My suggestion does nothing to protect assets from your personal liability as the manager. You will need something else to plug that hole.

Thank so much you for your help!!

My understanding was that a transfer to a land trust does not trigger the DOSC but that any subsequent transfer of beneficiary interest does violate the DOSC. However, since the transfer occurs outside of the public record there’s no practical way for the lender to know what’s going on. Except through discovery in an action that hopefully doesn’t occur…

Given the “just quit claim it to the LLC because the lender won’t call the loan” approach seems to be so popular these days, I thought this was a bit more elegant.

And I do understand that actions I personally take as manager of the LLC expose me to liability. Of course, if I fastidiously use third parties to maintain the property with (hopefully) their own liability coverage that should limit my personal exposure.

A nice generous slathering of liability insurance on top makes the cake - at least in practical terms.

But this question was mostly directed towards the tax ramifications of this arrangement - the Schedule E (C?) impacts, etc.

Nevertheless, thanks again for your help. It’s helped focus my approach.

As far as the IRS is concerned, the trust and the LLC are pass through entities. If your LLC is a single member entity, then there is no tax return for the LLC either. In this case, report your rental expenses and rental income on Schedule E (1040) as if the trust and LLC did not exist.