GA Resident Seeking Advice on Transferring Rental Properties to LLCs or Trusts then LLCs

[TH411]

GA resident thinking to create LLCs for three rental properties in GA and wants to know the tax implications for the rental properties when they are created and how the below scenarios may affect taxes.

The two different scenarios include:

1. Create three LLCs for the rental properties as single member without a trust.
2. Create a trust and then a LLC for each of the three rental properties. 

[tagteam · Accepted solution]

If the trusts are grantor trusts, then there are no tax implications as they are treated as disregarded entities for federal income tax purposes.

If the LLCs are single-member LLCs (without an election to be treated as corporations), then there are no tax implications as they are treated as disregarded entities for federal income tax purposes.

[TH411]

Thank you.   So they will continue to file a SCH E (and any relevant forms, such as the 8582), the same as if LLCs or trusts were not created and the properties were not transferred to either a LLC or trust then a LLC?  Will the only taxes be at the time of transfer, if applicable based on GA state law for transfers of rental property to a LLC or trusts?  If taxes are to be paid with the transfer - are those payments deductible?

[tagteam]

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@TH411 wrote:

So they will continue to file a SCH E (and any relevant forms, such as the 8582)....

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Who is "they"? 

Also, I am not familiar with GA law in terms of income (or other) taxation, but there are income taxes and also transfer taxes (typically imposed at the county level) with respect to real estate. Thus, we need to be specific as to which type of taxes you are referring.

[TH411]

"They" refers to the GA resident seeking advice.

For Federal tax purposes, it would appear from your initial response that there will be no change in how the GA resident currently reports the rental properties using SCH E with either scenario.  I'll obtain information on GA state tax.

[Carl]

I am not knowledgeable at all on trusts.

Transferring properties to a single member LLC changes nothing for tax reporting. All rental income/expenses still gets reported on SCH E as a part of your personal 1040 tax return. Nothing concerning the rental is reported on SCH C.

Transferring properties to a multi-member LLC also changes nothing tax-wise. The multi-member LLC will issue each member a K-1 which gets entered on the personal 1040 tax return. The information ends up on page 2 of the SCH E as a part of the owner's personal 1040 tax return.

Some possible issues with transferring property ownership.

1. If mortgaged, the mortgage lender typically will not allow it. You would have to "sell" it, or refinance it to the LLC and pay all applicable closing and other costs associated with that.

2. Property insurance could be an issue, as liabilities may (or may not) be different for a disregarded entity.

Since I know GA taxes personal income, you would be highly advised to seek the services of a professional well versed in "ALL" legal aspects of this; especially on the tax front.

[TH411]

Thank you for the information and for confirming that nothing will change regarding form requirements for Federal tax purposes.  I will look more into the GA state tax laws.

[tagteam]

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@TH411 wrote:

"They" refers to the GA resident seeking advice.

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It is somewhat critical because a "we" or "they" could imply that there is more than one member of the LLC (rather than "they" being used as a singular pronoun).

A multi-member LLC would change the analysis.

[Critter-3]

Even if you put the rentals in an LLC  it will not save you from a lawsuit ... your best defense is a good liability RE insurance  policy.

[TH411]

Thank you.  I will pass this along as well.

[TH411]

Thank you.  It is single-member.  The resident is looking to create one LLC for each rental property (or trusts first then LLC).

[Critter-3]

Putting each rental in it's own SMLLC is a waste of time and money since most states require you to pay an annual fee for each LLC.  Thinking that putting all of them in separate LLCs will save the properties if you are sued you are very mislead.  To secure them you would have to incorporate and the properties would have to be in the name of the corporation which you may not be able to do if you have a mortgage.  PLEASE talk to a local tax pro and/or RE attorney to review your concerns and options.

[tagteam]

I agree with @Critter-3; talk to a local real estate lawyer.

Further, note that titling the properties in the name of a corporation could only be effective to avoid personal liability; the properties could still be ordered by a court to be sold in order to satisfy a judgment.

Moreover, plain vanilla, grantor trusts will not be effective as a liability shield either.

[TH411]

Thank you for the insight.

[TH411]

Good point.  I'll pass this along for consideration.