It seems the more I read about this, the more confused I get.
What’s the best business entity for an investor that wholesales properties?
If after building up some cash wholesaling, what would be the best entity for adding on rentals to a portfolio?
LLC.
NEVER rent a property. If you’re going to hold it always have a positive cash flow.
Da Wiz
LLC all the way.
Superior asset protection compared to a corp; plus excellent tax flexibility.
I have found that having property in an LLC is not enough. You need to then have a second level of protection in a trust since shares of an LLC can be viewed as your personal property.
The other alternative would be to show a trust as the member rather than yourself that way the ownership is totally private and is not viewed as your personal property.
I have no idea about the tax implications but I would imagine if you are investing then you would be utilizing a 1031 exchange which can be done inside of a trust.
If I’m wrong someone please correct me since this is the way I’m doing it.
Thanks and Good Luck
ownership of a trust is personal property as well. I fail to see the difference. Placing property in a trust with LLC as beneficiary does provide some additional protections.
Personal property is generally not available to satisfy judgement creditors; that’s why it’s done. so what’s the problem with LLC membership?
Personal property that pays distributions to the member is up for grabs by a judgement creditor via a charging order so unless you never intend to take any distributions then a creditor can wait on the distribution.
If someone understands this concept well enough to avoid receipt of membership distribution I guess the LLC would be fine.
That’s why we take title in an LLC AFTER placing the property into a land trust. The trust is NOT a member. A charging order will be ineffective. "A creditor of a beneficiary in a co-beneficiary land trust may not attach the land or claim an interest in its corpus.
It is prudent and highly advisable for land trust participants to hold their respective beneficiary interests in a Limited Liability entity such as, say, a Limited Partnership or a Limited Liability Company (LLC). In so doing, each beneficiary can then be free of concern about the accidental or untoward misdeeds of the other (i.e., dealings that could otherwise easily involve the property’s title by either party’s creditor’s claims, tax liens, bankruptcy, legal actions in marital disputes, probate, etc.).
“Since the interest of the beneficiaries under a land trust is personal property, and since the trust agreement expressly precludes the vesting of any legal or equitable right in a beneficiary, partition is not available.”
Da Wiz
Thank you for the clarity on sequence. Very helpful.
and what’s the problem with a charging order, anyway?
IRS has ruled that recipient of a charging order is liable for tax on charged income. Meaning that the adversary is now paying income tax on my LLC’s income. I don’t have ANY problem with that.
Further, since I funded the LLC with a note, rather than a capital contribution, I can still pull out cash by paying off the note rather than making a distribution. I don’t have a problem with that.
And finally, when confronted with paying taxes on income that they’re never going to receive, the recipient is much more inclined to settle for nothing (or not to sue at all). I certainly don’t have a problem with that.
I just don’t see any problems here.
Hey Mark,
Great comments, and suggestions. Thanks for your help in understanding these issues. Im about to buy my first re-hab property in the San Francisco Bay Area, and am familiar with LLC’, and S Corp’. I will be borrowing the money for the down payment againt my stock holdings. After the rehab, I plan to pay back my fund. What would be my tax implications from this scenario if any? Thanks in advance, Ryan
let me make sure I’m understanding you correctly.
you intend to put other investments that you own up as collateral for a personal loan. You are then going to loan these loan proceeds to the LLC. did I get it?
no problems. make sure that the loan to the LLC is at a higher rate than the loan you owe to fidelity (or whoever). the interest you make is interest income to you. the interest you pay to fidelity is deductible as “investment interest”. so, the difference between the two is taxable income to you. other than that, no issues here.
scenario two: you are cashing in stocks to make the loan to the LLC. in this case, you will have gains on the sale of the stocks. then you will have interest income from the LLC. in this case, you don’t have any deductible investment interest since you didn’t borrow the money you’re loaning. man, that sounds weird.
the biggest disadvantages I see with this plan are: a) you pay taxes on the stock sales today, 2) you give up that stock growth for x time D) I’d hate to see you putting your retirement or emergency funds at risk for this investment. If it’s “extra” money that you’re playing with, then best of luck with the real estate business.
Thank You. I just do not want to get too complicated with land trust’s, etc.