I want to transfer 3 properties held in my personal name into my newly-formed LLC.
Do these deed transfers create a taxable event either for me personally or for the LLC?
How do I handle depreciation going forward? Do I continue on the present schedule or start new depreciation calculations?
And concerning capital gains when I sell, does my holding period reset to “day 1” when the transfers are done?
How is the LLC set up to be taxed?
…set up as partnership, my spouse and I own the properties and the LLC.
The CPAs will correct me, but the transfers are not taxable events and the depreciation and basis of the property remains unchanged.
Here is what I found when I researched it - a) it is not a taxable event.
b) One benfit if offers is the ownership percentage - you can vary between you and your spouse
However, the disadvantage is that your personal umbrella liability doesnpt hold for your LLC - you will have to buy it seperately. Another, thing to watch out for is if your mortgage lender can call the loan if this transfer happens (it is very remote possibility, but given the industry crisis something to be aware of)
Nick
I noticed that you and your wife are the only owners/members of your LLC and that you filed it as a “partnership” - I did the same thing but discovered that the IRS will treat you (taxwise) as a Sole Proprietorship instead of a LLC Partnership because the members are family. I wound up filling an 8832 form and having the IRS tax me as a S-Corp. There are too many reasons to list here, but you may want to talk to your CPA about this so you don’t have any surprises.
husband/wife partnership or sole proprietor will pay the same total tax either way. S-corp saves zero taxes unless the LLC makes enough to pay a reasonable salary and may have some significant negative tax impact if you ever need to get the property distributed back out of the company. C-corp has lower tax rate, and some better benefits available, but only if you never need to take cash out of the company.
not a taxable event. you are not “selling” the property, but making an equity contibution of assets to the entity.
no change in basis. the entity’s basis is your personal basis going in.
mcwagner,
The way it was explained to me is that the LLC treated as a S-corp was more (tax) beneficial than a LLC/Sole Propritorship because of the equipment and OTHER purchases that could be made under the S-corp offered more tax deductions and less personal outlay of cash (“Buy everything you can via the company.”). Is this not so? That’s a highly abbreviated brief of a conversation with my consultant.
Also, I don’t understand how a “C-Corp has a lower tax rate.” A LLC/S-corp is a tax pass through with no corporate tax and a C-corp has the addition of the corporate taxes on the profits before a distribution is made and then it’s taxed again when you receive the money as earnings or a capital gain. The C-corp also has a whole bunch of extra hoops to jump through - right? I know some people have reason to leave ALL their profits/cash in the company but I (and many people) am not one of them.
I am not an expert in this field so evidently I’m missing something here - please elaborate so I can beat the c&@% out of my business consultant (Ha Ha).
Thanks your comments are highly appreciated!
Gary
ALL business expenses are ALWAYS deductible, regardless of what entity you do or don’t have. (S-corp actually offers FEWER deductions because things like shareholder health insurance are considered taxable to the shareholder.)
I said C-corp has lower tax rates IF you don’t take cash out of the company. For most real estate investors, there is not a significant cashflow, thus the lower corporate rates save tax $$. If you need to take cash out, all pass thru entities are virtually the same UNLESS the company has enough cash to pay a salary; in this case the S-corp may offer lower total taxes because distributions in excess of the salary may avoid self-employment taxes (FICA). If you can’t pay a reasonable salary, pass thru entities will be taxed at marginal rates plus self-employment tax on everything that’s not rental income. That’s 22% to 45%. The corporate tax rate of 5% or 15% may be lower, even when added to the 25% dividend rate.
While a full C-corp does have extra “hoops,” the LLC taxed as C-corp does not; it is still an LLC. Thus, no annual meetings, corporate minutes, etc. And your comment was with regard to TAXES, not hoops.
What about a quit claim deed? I’ve heard that may be an option from some lenders as a way to not trigger a due on sale clause.
any transfer, other than to a properly set up land trust, violates DOSC. However, I’ve never seen a performing note called for this reason.