Texas LP or LLC and Transferring Title

General Real Estate Investing
1

Hi All,

I’ve planned on creating a partnership (either LP or LLC) to accept equity contributions from friends and family who are interested in making money in real estate but are too busy or don’t know enough about it.

In lieu of management fee I plan on taking a reallocation of equity interest.

My first acquisition (for the partnership) is a house in Texas. I plan on purchasing this in my name, obtaining legal counsel and then form the entity and transfer the house to the entity. I am set to sign the contract this week.

Now I will have a house under the name of my partnership, but the mortgage will still be in my name. Can this be done?

The partnership will file a 1065 partnership return, however I want to be sure that the partnership (or LLC) can take the deduction for the interest expense because the mortgage will still be in my name.

Does anyone have any experience with investing with other partners and transferring assets to an outside entity?

Also, I am thinking of using the LP (with myself as general partner) to get around the franchise Tax in Texas, however if I do so, then my limited partners may not be able to take losses that are dissallowed by the passive activity rules. If I use the LLC then the limited partners can take the losses (correct?) but will also be subject to self employment tax and the LLC may be taxed as a corp in Texas (which may be moot because after depreciation maybe it will have zero income).

For me personally, with either entity I will have self employment tax, but the LLC will afford me greater asset protection.

Any thoughts on this? (I’m leaning toward LLC)

In any event, I’m more concerned about the mortgage interest deduction being allowed at the LLC level, even though its in my name and am wondering if the mortgage can be in my name although the collateral will be in the name of the LLC.

Also can anyone recommend an attorney in Texas who is trustworthy and not too expensive? Thanks.

Thanks a million. :wink:

2

Dave,

The property is still partitionable realty and subject to liens and encumbrances. Assigning beneficial interest to the LLC after creation of a land trust is an unrecorded event and has an added benefit from a lender’s standpoint, of a clean chain of title, avoiding any seasoning issues assuming your intent is to refi at some point. Good luck.

3

Dave,
Gary replied with sound advice regarding land trusts and just to add using land trusts will help you manage your partners via their perspective beneficial intersts in the trust which is a private transactions and also providing them with very good asset protection.
As to how you get paid in how your alluded to equity interest just take a beneficial interest in the trust you create for your clients.
Since to echo gary if you vest title to your LLC you will create title issues and DOS triggers and the lender could potentially call the loan so why chance it…??
AS to the LLC tax questions get with that attorney and I can not give tax advice but opinion is LLC is a good entity for R/E acquistion for longer holds…

4

Dave,

I am a real estate attorney, not a tax attorney, so I’m not really sure about the passive loss rules and the partnership taking a deduction for a mortgage that’s in your name.

However, I do know that unless you’re going to have more than $150,000 in gross receipts, your proposed LLC will not be liable for any franchise taxes, so I would advise that entity for owning one investment house.

If you’re buying a big apartment project, that’s another matter.

Let me know if you have any other questions.

5

Thanks for joining us Drew. A lot of people need the opinion of a good Texas attorney.

  1. From my understanding, land trusts are not recognized in Texas, correct?

  2. Also, if she holds title in a different name that what’s on the mortgage, wouldn’t that trigger a due on sale or go against the deed of trust?

My real estate lawyer recommended that I hold title in an LLC or LP for asset protection since a charging order is less hurtful to an entity than if someone took your stock. The LLC or LP would also be on the mortgage and insurance docs, though.

6

Dee,

I believe your understanding is incorrect. Land trusts are legal in Texas as they do not involve executory contracts. In fact, I am currently a participant in several land trust transactions in Texas as we speak.

Title may be held in the name of the Trustee without triggering the DOSC. So, if you own title to your property and are on the mortgage under Dee Austin, and you place your property in trust and deed the title to JCL, your trustee, this is legal under Garn-St.Germain (d) (8) and no lender can call the loan. I know this from personal experience because I did just that on my own California property and contacted the Lender who not only was carrying my mortgage but my homeowners insurance as well. I called the loan officer to advise of my intent to move out and triple net lease the property. I also changed my insurance to landlord coverage and required my tenant to provide renters insurance. The loan officer confirmed my action was legally protected and that the DOSC could not be invoked.

As to taking title under the LLC for asset protection, the property is still partitionable realty and subject to liens and encumbrances. Assigning beneficial interest to the LLC after creation of the land trust would afford the asset protection you seek. Remember, assigning (not transferring) a beneficial interest in the trust (personal property) has no effect on the title and is a legally unrecorded event. Example: you own a 90% interest and transfer 50% to another beneficiary. If you were to transfer all of your interest, that may trigger the DOSC.

I hope this is of some help to you and answers your questions.

7

Dee,

“Land trusts,” as everyone calls them, are legal in Texas–in fact, Texas is a deed of trust state, so technically speaking, every single mortgaged property in Texas is held in trust.

Technically speaking, the grantor (the seller) transfers the property to a trustee (usually the seller’s attorney), who holds it in trust for the benefit of the beneficiary (the buyer).

Now, when everyone talks about a “land trust,” they’re talking about something slightly more complicated as a means of asset protection and privacy. This would actually involve a trust agreement also, where the homeowner deeds the property to “The 123 Main Street Trust,” or whatever, with the homeowner as the beneficiary (which is reflected only on the trust agreement, which is not recorded).

In the context of a title transfer, the trust can simply assign the beneficial interest in the trust to the new buyer, and a traditional closing, with a new deed, etc., is not necessary.

Now, let’s be clear about a couple of things.

  1. A deed of trust does NOT violate the due on sale clause. That’s true.

  2. HOWEVER, an assignment of the beneficial interest in a trust DOES violate the DOSC. It is not recorded, and so therefore much more difficult to discover than a regular recorded deed, but let’s not pretend that we’re not violating the DOSC.

  3. Holding a property in trust is better than holding the property in your own name, but I’m not sure if it offers the same kind of liability protection as an LLC. It does make it more difficult for creditors and plaintiffs to find out who you are, but if they do find out, your personal assets would be exposed. The LLC offers less privacy, but more protection.

  4. Other considerations with holding the property in trust: you may not be able to refinance in the name of the trust, and you (probably) will not be able to get the homestead exemption on property taxes.

  5. And finally, I’ve never heard of a lender invoking the DOSC, as long as they get paid. All these jumping through hoops to mask the DOSC violation seems to me much ado about nothing. HOWEVER, what if you do get a lender who is fired up about the violation of the due on sale clause? Could the lender argue that this land trust creation and assignment of beneficial interest is a fraudulent transaction, designed to keep the lender in the dark as to what’s going on?

Something to think about.

8

Drew,

One question. in number 3 you wrote, “Holding a property in trust is better than holding the property in your own name, but I’m not sure if it offers the same kind of liability protection as an LLC. It does make it more difficult for creditors and plaintiffs to find out who you are, but if they do find out, your personal assets would be exposed. The LLC offers less privacy, but more protection.”

Isn’t it true that if two unrelated parties hold beneficiary interests in the trust, that it is not partitionable since it is personal property and therefore cannot be penetrated? Is that correct? If so, then combining the two (LLC and land trust) should provide the ultimate protection. Do you agree?

9

Drew,

I have said for many years “I am not fond of lawyers, but not crazy enough not to use one when needed.”

However, I enjoy you telling it like it is in the real world. A personal friend of mine does Asset Protection for Movie Stars, Entertainers, Corportate CEO’s and folks looking to keep what they own.

So when I see some of the posts about Land Trusts, etc., and knowing how it is really done for true Asset Protection, I think about how it all got started, hide the DOS clause, hide your identity, hide your assets, so this is the way Land Trusts are promoted and and some folks actually believe that.

John $Cash$ Locke

10

The question is: If two unrelated parties own the beneficial interest in a land trust, then it cannot be partitioned?

Well, I don’t actually know the answer to that one, but I don’t see why it couldn’t be. I would assume that the assignment of beneficial interest would specify the percentages of ownership (just like if a partnership owns real property, the partners’ interest in the partnership is personal property… but it can be partitioned).

I don’t know, what exactly is the scenario you are talking about?

And assigning the beneficial interest to an LLC, well now you’ve got some protection. Maybe more than you need (belt-and-suspenders)??

11

As the beneficiary of the trust, you might avoid personal liability for a mortgage. In some cases, liability can be restricted to the actual property, which enables you to safeguard other assets.

Judgments and tax liens against a beneficiary DO NOT attach to property in trust. Death, incapacity, and divorce of one of the owners will not necessarily affect the ability to sell, mortgage, or otherwise deal with the real estate. Also, one owner cannot compel the property to be partitioned among all owners.

I’m interested in your take on this, Drew.

12

Be careful when soliciting investors. The SEC frowns upon unregistered securities offerings and it’s very easy to cross the line.

Mark Wagner, CPA

13

What’s not clear to me is this: Why can’t we hold the title in LLC name. Other day I bought a business and financed with SBA loan … that business was titled to my LLC. Why not the investment properties? I understand that primary residence is different thing, but if you are active in investing… why can’t they simply let every one draw the title to an entity?

DFW

14

there’s no reason why you “cant”. you just have to find a lender who understands it and is willing to do it. and it will probably require a personal guarantee of the LLC’s debt.

15

Apparently most lenders want an individual’s name on the loan, not an entity. This is why I place the property in trust, retain 10% interest in the trust, and assign 90% to the LLC. The lender is powerless to invoke the DOSC.