Maximizing Protection and Minimizing Tax Returns

We have about a dozen our so properties in a rental real estate portfolio. Currently they are contained in a single LLC (taxed as partnership). As these properties get paid off, I want to spin them off to isolate the liability. It would easy to setup new LLCs for each property, but this would require separate tax returns for each LLC (assuming taxed as partnership). Would the following structure resolve my issue:

Holding Company LLC (taxed as partnership)
±— Property 1 LLC (single member, owned by Holding Company LLC)
±— Property 2 LLC (single member, owned by Holding Company LLC)
±— and so on through Property 12 LLC

So the Holding Company effectively owns a dozen single member LLCs. Since each of the single member LLCs is disregarded for tax purposes, they would rollup via the Holding Company. This should accomplish the goal of 1 tax return. I am not positive if the separation of each property into its own LLC would accomplish liability isolation since they are all owned by same parent LLC.

Any thoughts on this structure???

I wouldn’t simply “move them to their own LLC” as they’re paid off. I would think that you want to establish a limit on how much equity exposure (value of property minus debt, obviously) you are comfortable with in each LLC. Maybe that number is $250K. You may want to transfer some of your properties prior to pay off, as the debt is amortized and the market value of properties goes up. This amount is a function of your net worth, age, and risk tolerance. You may also want to isolate properties based on the likelihood of their generating lawsuits (ie. bad area properties together).

The bank should allow transfers done for asset protection and estate planning purposes, as long as the underlying owners are the same and everyone has given personal guarantys on the loan (this is almost certainly the case these days).

For taxes, the work is coming up with all the depreciation schedules and numbers to correctly populate the P&L columns for each property. Spreading the properties out on to a few more 1065’s is virtually no additional work, and your CPA should recognize this. Your holding company LLC would just introduce another entity you’d have to pay attorney and state filing fees to maintain, so I’d say forget it, unless your attorney thinks that it helps to enshroud your affairs in an impenetrably complex cloud that no low-life plaintiffs lawyer could ever figure out :). And of course there are other techniques to appear “invisible”, including land trusts and use of 3rd party agents when setting up LLCs with the Secretary of State.

I like how non-CPA’s always know how long a return should take to prepare.

Next time I’m going to tell my plumber how long it should take him to install the tub or make sure that the tile guy is in and out in 4 hours because “that’s how long I think it should take.”