Hi, thinking about buying a condo and maybe living there for 1-2 years, then renting it out (or maybe just renting it out immediately-realizing it would be cash-negative for awhile). Should I setup a special LLC, etc. Does anyone have any advice or recommended contacts to discuss further. I am a finance person and am looking for general advice on the best way to do this. I realize that, as owner,... [more]
Hi, thinking about buying a condo and maybe living there for 1-2 years, then renting it out (or maybe just renting it out immediately-realizing it would be cash-negative for awhile). Should I setup a special LLC, etc. Does anyone have any advice or recommended contacts to discuss further. I am a finance person and am looking for general advice on the best way to do this. I realize that, as owner, the tax benefits are different than they are as an investor. If, I pursue this, I would hire a lawyer/acct, but not ready to do that yet.
FRONT_PORCH: You usually have excellent posts on this website and I think you have purchased, lived there and then kept it as an investment later. Do you have any suggestions.
I have a particular condo in mind. The building is okay, but not where I really want to live (but it is good enough to live in for a couple of years). But I think it would be a good investment long term.
**IF I GET SERIOUS ABOUT THIS PARTICULAR CONDO, I WOULD HIRE SOMEONE.
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Response by front_porch
almost 16 years ago
Posts: 5325
Member since: Mar 2008
kar3f -- if you want to write me offline I'm happy to recommend my accountant, I think he's wonderful. I also have a lawyer who set up my LLC for a few hundred bucks -- though I've never used it to buy property.
Realize that I have kept an investment apartment for my own specific financial reasons -- not necessarily to get rich, but as a piece of my retirement plan. I'm a freelancer and it's really tough to make a pension contribution when I want a new sofa -- but paying the mortgage on the condo is something I do sort of automatically, so it forces me to save.
My second thought is that I *think* there's a difference in the approach between living in your property and then renting it out, and never living there. In the first case, for example, you would get a mortgage as a primary residence, which is probably easier at this point than getting a second mortgage.
Another point to note is that whatever you do, you need to be honest with your insurance company. Insurance if you have a tenant is different, and more expensive -- but if you move in, then move out and try to keep your old primary residence insurance to cover your tenant, and you actually have a claim, the insurance company will deny your claim on the basis that you were dishonest with them.
My last thought is that it's good to read one of the landlord books out there, if only to realize that you're not making money off your brains, you're making money off your time. I like "The Landlord's Troubleshooter" by Robert Irwin a lot.
ali r.
DG Neary Realty
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Response by gcondo
almost 16 years ago
Posts: 1111
Member since: Feb 2009
if you live in the unit and then convert to rental, the cost basis for the investment property becomes the lower of the market value at the time you convert to rental or the acquisition price.
Also, if you get a mortgage based on primary residence, you will sign a primary residence affidavit. If you intended to go investment all along, I guess at worst that makes you dishonest. But people's plans are allowed to change so I doubt you would be deemed in default and forced to pay the loan or refinance.
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Response by csn
almost 16 years ago
Posts: 450
Member since: Dec 2007
kar3f, I went through the same things years ago before I purchased my first investment property. I spoke to many different people and looked up many things. One thing I would recommend is the book "Rich Dad's Real Estate Advantages by Lechter and Sutton. It will give you most of the information that you have asked about and information that you never thought to ask. For $20 or so you can be a mini-expert. One thing that is very important is if you are going to rent your apartment out, it must be in an LLC. If a tenant or one of their visitors were to get hurt in your apartment and sue you, you could lose not only the apartment but everything else you own if not in a LLC. Good luck.
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Response by Mytwocents
almost 16 years ago
Posts: 24
Member since: Mar 2009
The LLC is just a liability shield. It should not generally affect the federal tax consequences unless you elect for the LLC to be treated as a corporation. As you note, you should talk to your attorney when the time comes.
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Response by skting
over 15 years ago
Posts: 12
Member since: Mar 2010
Hi front_porch, Could you please let me know the attorney or accountants you use to set up LLC? I would like to know. Thank you. Appreciate it!
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Response by front_porch
over 15 years ago
Posts: 5325
Member since: Mar 2008
Dennis Spates of Pelosi Wolf Ephron and Spates -- tell him Ali Rogers sent you.
ali
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Response by Mikev
over 15 years ago
Posts: 431
Member since: Jun 2010
Be careful how much they charge. An LLC is something that you can set up on your own. The fees vary by state. I think New York is around $500 or so. If someone is charging you a ton of money to set up it makes no sense. My father helps clients set up as part of his services and i know the mark up he charges is slight as there really is not to much involved.
All you need to do is have say a list of 3 names at least that you are willing to have for your LLC and file.
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Response by truthskr10
over 15 years ago
Posts: 4088
Member since: Jul 2009
The LLC also helps create another layer of anonymity from aholes like us looking up your unit on acris.
:)
(Hint; If anonymity is important, do your signatures and closing in person and don't sign a power of attorney, otherwise brighter bulbs put 2 and 2 together and have the buyer's name off of th acris filed power of attorney.)
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Response by CondoPresident
over 15 years ago
Posts: 133
Member since: Nov 2010
Here are few issues:
Gcondo brings up good point...if you're orginating a loan for a principal residence, you will have to attest to such...at the time of orgination. Note, however, the attestation does nto bind throughout life of loan. There are other clauses that HAVE THE EFFECT of requiring you to continue to use as a principal that I discuss below. As to the tax basis issue, agreed - and here's good IRS pub. on it....http://www.irs.gov/publications/p17/ch13.html#en_US_publink1000172224
Another issue: If you plan on living then converting then form your LLC (a no-brainer and will cost you roughly 1K - 3-is for setup, and another 600-700 in publication fees for new york county) prior to purchasing BECAUSE in every home loan there's a DUE ON SALE (or transfer) clause whereby once you transfer ownership from yourself personally to the LLC, the bank has the right to accelerate 30 years and make you pay the lump sum right then and there. The only way around this is if the bank agrees to waive, which 99% of the banks will not do. However, that doesn't mean the bank will NOT ignore the triggering of this clause...in most cases, as long as you are a performing loan (and consdering all the turmoil/foreclosures occuring right now), the bank is likely to ignore. Also note, that once the transfer occurs, your personal guarantee (also a clause in every principal residence home) will not go away. And as alluded to above, forming an LLC is no brainer as it (the LLC's) only asset will be the propoerty and NOT your personal belongings.
Your best bet is to form the LLC and go at the property as an investment BUT the bank will require 60-70% LTV and require a personal guarantee by you as a member of the LLC.
From tax perspective: Depending upon how much you finance, you still will be able to deduct the mortgage interest against the income to the property (like if it were your personal residence) as well as you must take mandatory depreciation deductions (27.5 years)...IRS Pub. 519 has all the info. Note, that unless you are real estate professional you WILL NOT be able to deduct any paper loss resulting from the rental propoerty (Annual rental income ='s say 50K, and you write off 60K in interest and depreciation for a paper loss of -10K) against your own personal income. This was big change added in 1986 revisions because boat loads of doctors were using this method to deduct down their own personal income (passive loss rules - complicated but a must-know for RE investing).
Also note that if you do live in as principal but then move out and rent, you can always MOVE BACK IN and get the benefit of the Section 121 personal residence exclusion (must do for, I think 2 out of last 5 years). Otherwise, if by the time you have an additional principal and the rental, but you want to sell the rental....it's in your best interests to do a Like-kind (1031).....and on and on and on....
kar3f -- if you want to write me offline I'm happy to recommend my accountant, I think he's wonderful. I also have a lawyer who set up my LLC for a few hundred bucks -- though I've never used it to buy property.
Realize that I have kept an investment apartment for my own specific financial reasons -- not necessarily to get rich, but as a piece of my retirement plan. I'm a freelancer and it's really tough to make a pension contribution when I want a new sofa -- but paying the mortgage on the condo is something I do sort of automatically, so it forces me to save.
My second thought is that I *think* there's a difference in the approach between living in your property and then renting it out, and never living there. In the first case, for example, you would get a mortgage as a primary residence, which is probably easier at this point than getting a second mortgage.
Another point to note is that whatever you do, you need to be honest with your insurance company. Insurance if you have a tenant is different, and more expensive -- but if you move in, then move out and try to keep your old primary residence insurance to cover your tenant, and you actually have a claim, the insurance company will deny your claim on the basis that you were dishonest with them.
My last thought is that it's good to read one of the landlord books out there, if only to realize that you're not making money off your brains, you're making money off your time. I like "The Landlord's Troubleshooter" by Robert Irwin a lot.
ali r.
DG Neary Realty
if you live in the unit and then convert to rental, the cost basis for the investment property becomes the lower of the market value at the time you convert to rental or the acquisition price.
Also, if you get a mortgage based on primary residence, you will sign a primary residence affidavit. If you intended to go investment all along, I guess at worst that makes you dishonest. But people's plans are allowed to change so I doubt you would be deemed in default and forced to pay the loan or refinance.
kar3f, I went through the same things years ago before I purchased my first investment property. I spoke to many different people and looked up many things. One thing I would recommend is the book "Rich Dad's Real Estate Advantages by Lechter and Sutton. It will give you most of the information that you have asked about and information that you never thought to ask. For $20 or so you can be a mini-expert. One thing that is very important is if you are going to rent your apartment out, it must be in an LLC. If a tenant or one of their visitors were to get hurt in your apartment and sue you, you could lose not only the apartment but everything else you own if not in a LLC. Good luck.
The LLC is just a liability shield. It should not generally affect the federal tax consequences unless you elect for the LLC to be treated as a corporation. As you note, you should talk to your attorney when the time comes.
Hi front_porch, Could you please let me know the attorney or accountants you use to set up LLC? I would like to know. Thank you. Appreciate it!
Dennis Spates of Pelosi Wolf Ephron and Spates -- tell him Ali Rogers sent you.
ali
Be careful how much they charge. An LLC is something that you can set up on your own. The fees vary by state. I think New York is around $500 or so. If someone is charging you a ton of money to set up it makes no sense. My father helps clients set up as part of his services and i know the mark up he charges is slight as there really is not to much involved.
All you need to do is have say a list of 3 names at least that you are willing to have for your LLC and file.
The LLC also helps create another layer of anonymity from aholes like us looking up your unit on acris.
:)
(Hint; If anonymity is important, do your signatures and closing in person and don't sign a power of attorney, otherwise brighter bulbs put 2 and 2 together and have the buyer's name off of th acris filed power of attorney.)
Here are few issues:
Gcondo brings up good point...if you're orginating a loan for a principal residence, you will have to attest to such...at the time of orgination. Note, however, the attestation does nto bind throughout life of loan. There are other clauses that HAVE THE EFFECT of requiring you to continue to use as a principal that I discuss below. As to the tax basis issue, agreed - and here's good IRS pub. on it....http://www.irs.gov/publications/p17/ch13.html#en_US_publink1000172224
Another issue: If you plan on living then converting then form your LLC (a no-brainer and will cost you roughly 1K - 3-is for setup, and another 600-700 in publication fees for new york county) prior to purchasing BECAUSE in every home loan there's a DUE ON SALE (or transfer) clause whereby once you transfer ownership from yourself personally to the LLC, the bank has the right to accelerate 30 years and make you pay the lump sum right then and there. The only way around this is if the bank agrees to waive, which 99% of the banks will not do. However, that doesn't mean the bank will NOT ignore the triggering of this clause...in most cases, as long as you are a performing loan (and consdering all the turmoil/foreclosures occuring right now), the bank is likely to ignore. Also note, that once the transfer occurs, your personal guarantee (also a clause in every principal residence home) will not go away. And as alluded to above, forming an LLC is no brainer as it (the LLC's) only asset will be the propoerty and NOT your personal belongings.
Your best bet is to form the LLC and go at the property as an investment BUT the bank will require 60-70% LTV and require a personal guarantee by you as a member of the LLC.
From tax perspective: Depending upon how much you finance, you still will be able to deduct the mortgage interest against the income to the property (like if it were your personal residence) as well as you must take mandatory depreciation deductions (27.5 years)...IRS Pub. 519 has all the info. Note, that unless you are real estate professional you WILL NOT be able to deduct any paper loss resulting from the rental propoerty (Annual rental income ='s say 50K, and you write off 60K in interest and depreciation for a paper loss of -10K) against your own personal income. This was big change added in 1986 revisions because boat loads of doctors were using this method to deduct down their own personal income (passive loss rules - complicated but a must-know for RE investing).
Also note that if you do live in as principal but then move out and rent, you can always MOVE BACK IN and get the benefit of the Section 121 personal residence exclusion (must do for, I think 2 out of last 5 years). Otherwise, if by the time you have an additional principal and the rental, but you want to sell the rental....it's in your best interests to do a Like-kind (1031).....and on and on and on....