quitclaim a LLC-owned rental property


S

STAREX

Let's say I have a rental property owned via a SMLLC. The rental
property was bought using cash and I'd like get some finance against
the equities in the property.

However I find it's extremely difficult to find a bank which is
willing to finance a LLC-owned rental property. So what I am thinking
is to first quitclaim the property to myself, get finance, and then
quitclaim back to the LLC. (assuming the bank will be OK when I
quitclaim back the property) Is there any potential tax consequence of
the two quitclaims?

Thanks.
 
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S

Stuart A. Bronstein

STAREX said:
Let's say I have a rental property owned via a SMLLC. The rental
property was bought using cash and I'd like get some finance
against the equities in the property.

However I find it's extremely difficult to find a bank which is
willing to finance a LLC-owned rental property. So what I am
thinking is to first quitclaim the property to myself, get
finance, and then quitclaim back to the LLC. (assuming the bank
will be OK when I quitclaim back the property) Is there any
potential tax consequence of the two quitclaims?
In my experience a lender will approve a loan for an LLC or small
corporation if the owner of the business can qualify for the loan and
will personally guarantee it.

The problem with your idea is that most mortgages have a "due on
sale" clause, allowing the lender to call the loan if it is
transferred to another person or entity.

___
Stu
http://DownToEarthLawyer.com
 
S

STAREX

In my experience a lender will approve a loan for an LLC or small
corporation if the owner of the business can qualify for the loan and
will personally guarantee it.

The problem with your idea is that most mortgages have a "due on
sale" clause, allowing the lender to call the loan if it is
transferred to another person or entity.
Can you recommend a bank that does this? Somehow many banks here (in
CT) only offer loans if the LLC-owned rental property has at least 10
units. Even so, the rate is much higher than if the same property is
owned by an individual. However quite some of these bank kind of hint
they won't exercise the "due on sale" clause if the property is
quitclaimed to a LLC owned by the same individual after the finance is
done.

Therefore I am quite interested in knowing whether there is any tax
consequence for such quitclaim as described in the OP. Any thoughts?
Thanks.
 
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R

Ron

STAREX said:
Can you recommend a bank that does this? Somehow many banks here (in
CT) only offer loans if the LLC-owned rental property has at least 10
units. ......
I own some rental properties in NJ and PA and I belong to real estate
investor groups in both states. In both areas, investors find that it is
more difficult and a lot more expensive to get mortgages on properties owned
in the name of an LLC (including single member LLC's) than it is on
properties owned as an individual. A lot of people that I know do exactly
what you are thinking of doing -- deed the property from the LLC to their
own individual name, then get a mortgage, then deed it back to the LLC
subject to that mortgage. Some investors have even had their bank suggest
that they do that in order to qualify for a mortgage.

In NJ, the deeding process is easy and very inexpensive. In PA, there is a
real estate transfer tax of something like 3% of the property value -- EACH
WAY -- when doing the deeds back and forth (6% round trip), so that is
usually too much to pay to make it worthwhile doing just to get a mortgage.
But it can be done.

I have never seen a lender invoke the due on sale clause when a property is
quitclaim deeded to or from an LLC subject to the existing mortgage, but I
assume that it could happen. Basically, if the mortgage stays current,
there is no real reason why a lender would bother to try to enforce a due on
sale clause.

I am fairly sure that TD Bank in New Jersey has a program where people can
get mortgages on individual properties that are owned in the name of an LLC,
but the rates and costs are much higher than those on properties owned by
individuals. And, I know that there are TD Bank locations in Connecticut.
Mortgage lending terms and criteria have been changing rapidly over the past
couple of years, so you would have to check to see what the current
situation is.

One way to get more information is to join a real estate investment club
near you. Here is one source for finding real estate investment clubs by
state: http://www.reiclub.com/real-estate-clubs.php .

Other than the possible state transfer tax issue, I don't think there are
any significant tax consequences involved when deeding the property back and
forth between your name and that of your single member LLC.
 

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