I was just told something by a CPA that I wanted to run by all of my fellow investors to make sure this is true, legal and/or proper.
I currently have a LLC in Alabama and seven rental SFR in Alabama. I was told in addition to the LLC, I should also get a “S” corp for better protection and better deductions come tax time. Does this make sense?
Are capital gains taxes deferred when a property is sold through a LLC? The reason I ask is the CPA told me just prior to selling a property, change the grant deed to the LLC and then have the LLC sell the property. This way and I am still not sure how, the capital gains taxes are deferred indefinitely through the LLC.
Thanks for all of your anticipated advice and comments.
As everyone has suggested above, this CPA should be replaced. If it’s income property, the ONLY way to defer taxable gains is via a 1031 exchange. That’s regardless of how the title is held.
I’d also be careful about putting too many properties into one LLC. Remember the domino theory. I set-up a separate LLC for each property (or you can use a straight Land Trust). The LLC management can be a Corp. but it should be a C-Corp; not an S-Corp. The C-Corp then manages all the individual LLCs but the individual LLCs stand alone regarding liability at each separate property. You’d do this if you’re concerned about liability law suits. The Charging Order concept available via a FLP is your best protection against frivolous law suits.
I too would like to know CPA’s strategy. He may have been referring to a private annuity trust type arrangement, which is now not allowed by the IRS. You can still use a private annuity, but you will have a very difficult time finding someone to do it as the correct way to structure the transaction is much more complicated than the traditional private annuity trust. You can also defer or eliminate taxes with the use of corporations and IRAs.
As an aside, multiple LLCs are unnecessary. Two entities, equity stripping, and UCC liens provide better protection. I’m not sure on the need for a management corp unless you plan to manage property for others. The property owner is the one who gets sued, not the manager, and if the manager and the members of the LLC are the same person or group of people, which is the case in most of these convoluted arrangements, the LLC protections are easily bypassed. The management company just adds a layer of hassle without a layer of protection.