Properties under an LLC

[ILLMAS]

Howdy. A client of mine ownes various properties under his name and wants to setup 2 LLC's (per his attorney request) to put the properties under the LLC's. I have a couple of questions regarding this, he can still report the properties on Sch E of the 1040 and would the attorney have to file a quit claim deed to add the LLC to the title of each property? Also, if he has 12 properties can he put 6 properties in one LLC and the other 6 in the other LLC? Any help on this matter would be greatly appreciated.

Thanks

[kcjenkins]

Yes, if he is the sole owner, the LLCs would be disreguarded entities, and he'd still report using the E. He could have 12 different LLCs, or two, or any number and devide the properties accordingly. He would quit-claim them to the LLC, most likely, although that could depend on whether they are mortgaged, and what the mortgage holder allows. That's for you to just mention, and he and the attorney need to decide how to do that. Not only does it depend on state laws that vary, it depends on what the mortgage-holder allows as well. You don't want to be in the middle here, so don't give any advcie on that except that he make sure it's done right, by the lawyer.

[jainen]

>>he can still report the properties on Sch E<<

Yes, for federal income tax. As his tax advisor, you need to let him know if there are any state requirements. In California an LLC usually must file an LLC return with an LLC fee and a minimum tax, in addition to the state and federal income tax returns.

I'm not a lawyer, but in my opinion it can be very difficult to maintain liability protection in a single-member LLC, and I suggest your client ask his attorney to give some details about that. I'll bet he can't cite a single case.

[michaelmars]

in any case if you want asset protection then 12 properties need 12 llc's

[ILLMAS]

Thanks everyone, agree 100% I should let his lawyer handle all this.

Again, thank you

MAS

[jainen]

>>Thanks everyone, agree 100% I should let his lawyer handle all this.<<

You are welcome, but that was not what I said. In my opinion, the tax advisor would have a key role both in the decisions and the implementation for this plan.

[kcjenkins]

Jainen is right, you should not assume that the lawyer knows the TAX implications. He's looking at legal liability, most likely, wantying to put a level of protection between the client and potential problems. But you need to discuss the tax effects with the lawyer, to be sure he and the client understand those.

[ILLMAS]

My client properties are currently all under his name and reports them on Sch E, lets say he creates 12 LLC's (single member), he would still report them on Sch E and his tax implication would remain the same?

"The tax implications of an LLC are not as beneficial when it comes to losses. You may not be able to deduct all losses for your business because you have chosen to limit your personal liability in the company."

By him being a real estate professional, his losses should not be limited, in his case? (Correct me if I am wrong).

[jainen]

>>being a real estate professional<<

The RE professional rules allow rental real estate to be a non-passive activity, but don't give guidance on this question which is similar to the unresolved one about limited partners. Whichever way you see it, there isn't much authority to back you up.

As for his tax implications, my prior post identified a couple of huge problems which might apply. And I sort of hinted that the lawyer might not be at all comfortable with reporting separate entities on an individual's return.