Ahh, another "Show Me" guy! Hello Shane!
Good lawyering Shane. Comingling funds is an opening that you can close somewhat by selling the property from yourself to the new LLC. I had a few properties that I ended up taking personally and sold tehm to my LLC at the payoff. I used a "subject to" contract from myself and my wife to the LLC. I used a Special Warranty Deed as you shoulddo with any Sub-2 transaction. Since my LLC did not obtain title insurance, assigning with a SW Deed provides good title to the LLC (subject to the existing lien) and keeps my personal coverage enforce so to speak in the event of any title problem.
If I were to quit claim the property, I only convey that interest which I MAY have in and to the property. If a title issue arises my LLC has no coverage. For any insurance policy of any kind, the insured must have an insurable interest in the property, they must suffer a financial loss to receive any benefit. A quit claim deed makes no guarantees as to conveying good title, but Ino longer have any insurable interest in the property, unless I'm sued. My LLC would need to make a claim against me and suing yourself as the principal memeber of the LLC and you personally, is rather hard to do. The title company won't buy it, IMO. Ask your attorney.
If I provide a guarantee of good title, subject only to the existing lien, I have an insurable interest in the property with the liability of the existing lien and I could act personally to protect the remaining interest under my title policy without having to sue myself.
However, if a third party were to ever sue you due to your past ownership of a property and you had title insurance, the insurance would defend you. So, it depends on what the claim is and who the third party seeks indemnification from.
I have never had a title issue that required a claim, knock on wood, but someone I know did, with a newly constructed home and the owner conveyed the property to an LLC. His title insurance whcih he closed on personally refused to act in the matter. It was taken care of in about a year of bickering with a contractor.
So these issues can be a fine line, using a Special Warranty Deed just makes that line a little thicker, in Missouri.
Another aspect is transferring the property at what appears to be an arm's length transaction.
IMO, a sale appears to meet the requirements better than a transfer of assets from me personally to my LLC. The appearance of acting independently as an individual and as a business entity is strengthened, with major assets. IMO, it is entirely different assigning personal property, such as a used computer, but that too should be purchased by your LLC.
See your tax advisor as to why.
As to the "due on sale" and you lender. I give notice to the lender as to what I'm doing. I understand why many don't, but those who don't might slide by easily. It may depend on how well equiped you are to state your case and overcome objections of the lender. I never had a loan called due and over a thousand deals trickled through my fingers. I did have some rather strong objections, usually from BoA, but the bark was worse than the bite!
Basically, I wrote a letter something like this:
I am arranging my personal affairs at the advice of my attorney and my assets are to be sold or transferred to my limited liability company. The company is held by my wife and I soley and no other members shall be admitted as the company is part of my estate planning.
The subject property secured by your deed of trust made on the ___ day of ______, ____ by myself and my wife shall remain in full force and effect and she and I remain fully responsible for the obligation as made.
The transfer for estate purposes shall be made on or about the ____ day of ________, ____ as currently scheduled.
In the event ____ (Name of Note Holder) has any objection to this personal transfer, please contact me at the address given below within 10 days of receipt of this notice and if no objection is made, consent shall then be considered to have been properly given.
Send it off registered mail, return receipt requested. Then wait, then I would proceed.
Another aspect of fighting with any lender claiming a breach of the covenants is that they always must give a notice to cure any default, if push comes to really hard shoves, simply deed the property back. Then there is no harm, no foul. But I never had to do that either.
I have used a quit claim deed as well, it depends on the property, IMO. My rule is that if a property is new, say less than five or seven years old, the risk of having any title claim is a little higher, especially due to property lines and more so in rural areas or where easements exist. If a property is in a palted subdivision and is an older property, your risk of claims as to property lines is minimal, IMO.
You should have gotten title coverage personally so you can look at Schedule BII and determine what is and what is not covered and assess the risks accordingly.
Better yet, ask the title company to issue a new policy to the LLC and they will only need to runtitle from the date your policy was issued to the date it is transferred and any search fee should be minimal, if any at all. You may also consider transferring your premiums to the new policy and terminate your coverage. You can not terminate the lender's coverage. Wheather or not a title company will do this will be up to them, if you have a good relationship with them (as I do) they will work something out with you.
Before you transer any property I suggest you discuss the issues with, your attorney, your title company, your lender (as required) and your tax advisor.
The great thing about rental property is that every cent you put into the property, whether for maintenance, repair or capital improvement, helps maintain the property's value and is also tax deductible, either in the same year the expense was made or proportionately over many years as depreciation. All maintenance costs are considered business expenses and are tax deductible in the current year.
Painting is usually the single largest maintenance cost associated with rental property. Whether it is exterior or interior, all painting costs are deductible: paint, labor, tools, everything it takes to do the job. Exterior painting is usually such a big expense that if you are planning to do it in the coming year you may want to consider completing the job the fall so you can deduct the costs on your current year's tax return.
Whether you are cleaning an apartment in between tenants, cleaning out a sewer line to avoid future plumbing problems or power washing the building's exterior, it is all tax deductible. Make sure to keep all receipts for materials, rental equipment and labor costs. If you are doing the work yourself, or even checking up on the person who is, remember to keep track of your travel costs to and from the rental property because that is deductible, too. You can only deduct the value of your own time if you have set up a business ownership of the property and pay yourself a wage, in which case you would have to claim income in order to take a deduction.
All repairs are a business expense. In this category, however, it is important to distinguish between a business expenses and a capital improvement. Capital improvements are improvements that demonstrably extend the useful life of the property and/or add to its value. Repairing a roof by replacing 10 percent of its shingles is a business expense. Replacing the entire roof is a capital improvement. The cost of a capital improvement is not fully deductible in the year it is paid. It is deducted proportionately over a long period of time. For instance, if a new roof costs $10,000, a small amount of the cost--$364--can be deducted each year for 27.5 years, which is the IRS-determined useful life of a roof on residential rental property.
Lawn maintenance such as mowing and trimming shrubs is considered property maintenance and is therefore an expense. A complete new landscaping would be a capital improvement.
Odds and Ends
If an old galvanized pipe in a wall breaks, the pipe repair or replacement, plaster replacement and all cleanup in the flooded apartments are considered deductible expenses. If you have to set mouse traps, they are deductible. Broken window? Its repair is deductible, unless it was the tenant's fault and you make him pay the bill. Many small repairs and maintenance assignments crop up in a rental building, especially if it is of an older vintage. A key in this category is to remember to keep all the receipts because the costs add up and will reduce your tax liability every year.
About the Author
Mary Gallagher runs Mary Gallagher Planning (mgaplanning.com), an urban planning and consulting business in San Francisco. She is the former assistant planning director for San Francisco and planning director for San Mateo. Gallagher has been writing about real estate, development and land use for numerous websites since 1995. She holds a master's degree in historic preservation planning from Cornell University.
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