• FreeAdvice has a new Terms of Service and Privacy Policy, effective May 25, 2018.
    By continuing to use this site, you are consenting to our Terms of Service and use of cookies.

Real Estate, LLCs, and Land Trusts

Accident - Bankruptcy - Criminal Law / DUI - Business - Consumer - Employment - Family - Immigration - Real Estate - Tax - Traffic - Wills   Please click a topic or scroll down for more.

afgirl3

Member
Hello! As new investors, my wife and I have acquired 3 rental properties and will be expanding to buy more. We are looking to formalize this business to keep its finances separate from our personal, as well as offer anonymity and legal protections...so we would like to form an LLC or a few.
Here are the details/complications
-1 property in CA, 2 properties in OH
-We have personal mortgages on properties
-We currently live in MA, but my wife's military service moves us often, and we are legal residents of different states
-We do not want to transfer title to an LLC directly to not trigger due-on-sale or mortgage complications, but set up a Land Trust per property with the Beneficiary as the LLC
Questions:
-Do we need a separate LLC to be the Trustee of the Land Trust? Could we personally be the Trustee or does that defeat the purpose of LLC anonymity and protections? If the Trustee should be an LLC, does it need to be an LLC within that same state? Does an LLC as Trustee complicate the mortgage situation or prompt due on sale?

-Does the Beneficiary LLC need to be in the state of the property (assuming yes) to avoid out of state complications like operating as a foreign entity? Going to initially set up the Trust as personally being the beneficiary and after transfer of title to the Land Trust, change the beneficiary to the LLC to avoid any potential due on sale issue.

-As a married couple, can we hold an LLC jointly but still as a SMLLC in OH which does not have the community property law?

-We would like to set up a SMLLC in NV, which has community property so we can hold the LLC jointly, and have this be the parent LLC to the state LLCs that will be the beneficiary of the Land Trusts for each property...1)would this parent LLC be the Trustee for the Land Trusts if the Trustee needs to be an LLC or will that trigger foreign entity issues? 2)if the OH LLC is set up as a SMLLC and therefore only one of us can be a member, does holding the parent NV LLC together offer ownership protection for the non-member of the OH LLC? 3) does holding each state LLC in the NV parent LLC still allow for pass-through taxes filed in our individual tax filing married, filing jointly, or does holding multiple state LLCs then make it a MMLLC?

-Since we will likely not be stationed in the states where we hold property/have the parent LLC, is this an issue for the LLC residency requirements...or does appointing a local registered agent company suffice?

Your help is appreciated and any suggestions on how to set things up are welcome!
 


FlyingRon

Senior Member
Understand, that if you are a one-man show (or perhaps two person), the LLC isn't going to give you much legal liability shield. You're always going to be responsible for your own action. There's also only the faintest amount of anonymity (a DBA filing will do just about as good). Of course, unless you have a long track record of property ownership, you'll find nobody is going to lend you money to an LLC (as you seem to have realized).

If the investment is neither owned nor operated by the LLC, what do you think the LLC is doing for you anyhow?

What do you think the trust is doing for you? Further, "land trust" is NOT the term you are looking for I would expect. Land trusts are non-profits used to hold land in some sort of stewardship.

Just instantiating your LLC in Nevada isn't going to escape taxation in the state the business is actually operating/located in.

You can create a single member LLC in Nevada as a couple, you can't in non-community property states (like Ohio).

You're going to have to explain what "residency" requirements you are talking about. All entities must have an in-state registered agent (or something the state allows to substitute for that function).

I would recommend you get an attorney to educate you in what would make sense in your situation and help with filing the appropriate documents and creating whatever entities are necessary..
 

afgirl3

Member
Understand, that if you are a one-man show (or perhaps two person), the LLC isn't going to give you much legal liability shield. You're always going to be responsible for your own action. There's also only the faintest amount of anonymity (a DBA filing will do just about as good). Of course, unless you have a long track record of property ownership, you'll find nobody is going to lend you money to an LLC (as you seem to have realized).

If the investment is neither owned nor operated by the LLC, what do you think the LLC is doing for you anyhow?

What do you think the trust is doing for you? Further, "land trust" is NOT the term you are looking for I would expect. Land trusts are non-profits used to hold land in some sort of stewardship.

Just instantiating your LLC in Nevada isn't going to escape taxation in the state the business is actually operating/located in.

You can create a single member LLC in Nevada as a couple, you can't in non-community property states (like Ohio).

You're going to have to explain what "residency" requirements you are talking about. All entities must have an in-state registered agent (or something the state allows to substitute for that function).

I would recommend you get an attorney to educate you in what would make sense in your situation and help with filing the appropriate documents and creating whatever entities are necessary..
Thanks for the response! We are wanting to operate our rentals from the LLC business so we can maintain a business account, credit card, ect. as well as have the LLC as the Landlord on lease agreements. So, the LLC would actually be operating the rentals and not us personally. And yes, the Land Trust stewardship is exactly what we are looking for so the Title of the property is held in the Land Trust (and thereby removing our name from public record). We could make the Land Trust beneficiary our own name, but were advised to make the beneficiary the LLC since we are desiring to operate the properties from the LLC. However, we want to operate from one parent LLC as opposed to multiple state LLCs given we are expanding to additional state markets...the only way I can see that working is having a community property state LLC as a parent so we can jointly operate our LLC/business.
There is absolutely no intent of escaping taxation as you state, but simply not being double-taxed and setting things up to take advantage of pass-through tax laws so we only have to file our real estate income taxes via our personal tax filing.
Do you have advice on how we could better set things up or an attorney you recommend?
 

FlyingRon

Senior Member
No, a land trust is NOT what you are looking for. Your land trust can't operate for your private benefit and the benficieary can't be you or your non-charitable LLCs. You want to use the "real estate trust."

However, your statement of avoiding a due-on-sale is not met by transferring the property to any real estate trust. The only protection is transfer to your in vivos (living) trust.

If you're going to have the LLC anyhow, the trust seems to be a spurious layer.

I'm confused as to what "double taxation" you think you're avoiding. You can still elect S corp treatment of the LLC.

Understand that while you're removing the name from certain land records by using a trust or LLC, you're not really hiding anything. Anybody who is determined can still find you. Nevada is not particularly difficult to do this in (regardless of what the scammers who want to sell you Nevada LLC services will tell you), unless you're going to employ other people as managers to further obscure things.

And when it comes down to a lawsuit, it's going to be immediately discoverable once your company is served.
 

Taxing Matters

Overtaxed Member
No, a land trust is NOT what you are looking for. Your land trust can't operate for your private benefit and the benficieary can't be you or your non-charitable LLCs. You want to use the "real estate trust."
The term "land trust" refers to several different kinds of trusts that involve holding real estate. That's also true of the term "real estate trust." Because of that neither term is all that helpful in understanding what any particular trust that has had one of those labels slapped on it does. You have to look at what the trust terms are to sort that out. The OP certainly could create a trust to hold the real estate with himself/herself as a beneficiary of the trust, whatever label you may want to put on it.

However, your statement of avoiding a due-on-sale is not met by transferring the property to any real estate trust. The only protection is transfer to your in vivos (living) trust.
I do not agree. All trusts except testamentary trusts (trusts created from a will) are inter vivos trusts (what are often popularly called "living trusts"). So the real estate trust/land trust being discussed here would be an inter vivos trust. So I don't see the distinction you are trying to draw on this. I'm guessing you meant to say that only transfers to a revocable living trust, which is the most common trust used for estate planning purposes, are protected. If so, that's not right.

The federal Garn–St Germain Depository Institutions Act of 1982 included a provision that prevents triggering due-on-sale provisions in certain situations. In order to qualify the property must be residential real estate containing less than five dwelling units. The law then lists various situations in which the lender may not enforce a due-on-sale provision. The one applicable here protects "a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property". 12 U.S.C. § 1701j-3(d)(8). Thus, a transfer to any inter vivos trust, whether revocable or not, can qualify so long as the OP is and remains as a beneficiary of the trust. So a real estate or land trust could certainly qualify for that.

The real problem here, however, is that only properties that are occupied by the borrower will get the protection. This is due to regulations issued by the Federal Home Loan Bank Board that provides more details on the exception provided in the Act. Specifically, it protects:


(vi) A transfer into an inter vivos trust in which the borrower is and remains the beneficiary and occupant of the property, unless, as a condition precedent to such transfer, the borrower refuses to provide the lender with reasonable means acceptable to the lender by which the lender will be assured of timely notice of any subsequent transfer of the beneficial interest or change in occupancy.
12 CFR 591.5(1)(vi)(bolding added). Thus, the the transfers to the trusts won't work to avoid a due on sale except for a property in which the OP himself/herself actually occupies. That being the case, the trusts won't seem to help the OP with the properties he/she already owns as investment properties.
 
Last edited:

FlyingRon

Senior Member
Good point... I'd forgotten about the further restriction on Garn-St. Germain. Further, they need to be careful that they don't misrepresent the acquisition of the property as owner-occupied when they finance these things.
 

Taxing Matters

Overtaxed Member
We do not want to transfer title to an LLC directly to not trigger due-on-sale or mortgage complications, but set up a Land Trust per property with the Beneficiary as the LLC
As I noted in my prior response the trusts won't work for you for any properties you do not occupy. And even if you occupy it at the time of transfer, if you move out that move may trigger the due-on-sale clause. So I'm not seeing a benefit to using the trusts to avoid that problem.

Do we need a separate LLC to be the Trustee of the Land Trust? Could we personally be the Trustee or does that defeat the purpose of LLC anonymity and protections?
You could be the trustee of the trust. That would not defeat the anonymity you are looking for unless the state in which the trust is settled requires a public filing of the trustee information.

Does the Beneficiary LLC need to be in the state of the property (assuming yes) to avoid out of state complications like operating as a foreign entity?
Certainly if it is formed in some other state it would likely also need to register as a foreign LLC in the state where the property is located. There is not much complication from that apart from additional fees to that second state and additional filings with that second state.

As a married couple, can we hold an LLC jointly but still as a SMLLC in OH which does not have the community property law?
In every state if two people own a LLC then it is not a single member LLC, even if the couple is married. However, under federal tax law a LLC owned by a husband and wife living in a community property state can elect to be treated for income tax purposes as though it were a single member LLC. As Massachusetts is not a community property state that election is not an option.

We would like to set up a SMLLC in NV, which has community property so we can hold the LLC jointly
Again, outside of tax law, any LLC owned by a husband and wife is not a single member LLC. Indeed, you'll find no option on the Nevada forms for organizing the LLC with the Secretary of State any election to treat a LLC owned by a married couple as a single member LLC. That is simply a function of tax law. Specifically, it is Rev. Proc. 2002-69 that sets out the rules for this. In order to qualify, the business must meet all of the following:

A business entity is a qualified entity if:
(1) The business entity is wholly owned by a husband and wife as community property under the laws of a state, a foreign country, or a possession of the United States;
(2) No person other than one or both spouses would be considered an owner for federal tax purposes; and
(3) The business entity is not treated as a corporation under § 301.7701-2.

Rev. Proc. 2002-69, 2002-2 C.B. 831 (2002).

The problem here is that whether ownership of a LLC member interest or stock in a corporation is community property turns not on the state in which the LLC or corporation is organized, but rather where the married owners reside. You currently live in Massachusetts, which is not a community property state. So the member interests would not be community property either. If the member interests are not community property then you cannot make the election to treat those interests as the interests of just one of the spouses.
 

afgirl3

Member
The term "land trust" refers to several different kinds of trusts that involve holding real estate. That's also true of the term "real estate trust." Because of that neither term is all that helpful in understanding what any particular trust that has had one of those labels slapped on it does. You have to look at what the trust terms are to sort that out. The OP certainly could create a trust to hold the real estate with himself/herself as a beneficiary of the trust, whatever label you may want to put on it.



I do not agree. All trusts except testamentary trusts (trusts created from a will) are inter vivos trusts (what are often popularly called "living trusts"). So the real estate trust/land trust being discussed here would be an inter vivos trust. So I don't see the distinction you are trying to draw on this. I'm guessing you meant to say that only transfers to a revocable living trust, which is the most common trust used for estate planning purposes, are protected. If so, that's not right.

The federal Garn–St Germain Depository Institutions Act of 1982 included a provision that prevents triggering due-on-sale provisions in certain situations. In order to qualify the property must be residential real estate containing less than five dwelling units. The law then lists various situations in which the lender may not enforce a due-on-sale provision. The one applicable here protects "a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property". 12 U.S.C. § 1701j-3(d)(8). Thus, a transfer to any inter vivos trust, whether revocable or not, can qualify so long as the OP is and remains as a beneficiary of the trust. So a real estate or land trust could certainly qualify for that.

The real problem here, however, is that only properties that are occupied by the borrower will get the protection. This is due to regulations issued by the Federal Home Loan Bank Board that provides more details on the exception provided in the Act. Specifically, it protects:


(vi) A transfer into an inter vivos trust in which the borrower is and remains the beneficiary and occupant of the property, unless, as a condition precedent to such transfer, the borrower refuses to provide the lender with reasonable means acceptable to the lender by which the lender will be assured of timely notice of any subsequent transfer of the beneficial interest or change in occupancy.
12 CFR 591.5(1)(vi)(bolding added). Thus, the the transfers to the trusts won't work to avoid a due on sale except for a property in which the OP himself/herself actually occupies. That being the case, the trusts won't seem to help the OP with the properties he/she already owns as investment properties.
As a follow-up, the mortgage was already procured as an investment with the known state of not ever taking occupancy/residency of the property. Am I correct to assume that this means the lender would therefore only care of a change in beneficiary (there wouldn't be) or in occupancy (which again wouldn't change as originally secured as an investment property)?
 

afgirl3

Member
As I noted in my prior response the trusts won't work for you for any properties you do not occupy. And even if you occupy it at the time of transfer, if you move out that move may trigger the due-on-sale clause. So I'm not seeing a benefit to using the trusts to avoid that problem.



You could be the trustee of the trust. That would not defeat the anonymity you are looking for unless the state in which the trust is settled requires a public filing of the trustee information.



Certainly if it is formed in some other state it would likely also need to register as a foreign LLC in the state where the property is located. There is not much complication from that apart from additional fees to that second state and additional filings with that second state.



In every state if two people own a LLC then it is not a single member LLC, even if the couple is married. However, under federal tax law a LLC owned by a husband and wife living in a community property state can elect to be treated for income tax purposes as though it were a single member LLC. As Massachusetts is not a community property state that election is not an option.



Again, outside of tax law, any LLC owned by a husband and wife is not a single member LLC. Indeed, you'll find no option on the Nevada forms for organizing the LLC with the Secretary of State any election to treat a LLC owned by a married couple as a single member LLC. That is simply a function of tax law. Specifically, it is Rev. Proc. 2002-69 that sets out the rules for this. In order to qualify, the business must meet all of the following:


A business entity is a qualified entity if:
(1) The business entity is wholly owned by a husband and wife as community property under the laws of a state, a foreign country, or a possession of the United States;
(2) No person other than one or both spouses would be considered an owner for federal tax purposes; and
(3) The business entity is not treated as a corporation under § 301.7701-2.

Rev. Proc. 2002-69, 2002-2 C.B. 831 (2002).

The problem here is that whether ownership of a LLC member interest or stock in a corporation is community property turns not on the state in which the LLC or corporation is organized, but rather where the married owners reside. You currently live in Massachusetts, which is not a community property state. So the member interests would not be community property either. If the member interests are not community property then you cannot make the election to treat those interests as the interests of just one of the spouses.
Thanks for the clarification. However, would you be privy to how this works given my wife is the military and where we physically reside is not her actual state of residency? My residency is forced to change to the state we reside (given my original state of residency, California...a community property state, is not the same as my wife's, and therefore states like MA do not recognize my state residency and force me to become a resident during our duration there).
 

Zigner

Senior Member, Non-Attorney
Thanks for the clarification. However, would you be privy to how this works given my wife is the military and where we physically reside is not her actual state of residency? My residency is forced to change to the state we reside (given my original state of residency, California...a community property state, is not the same as my wife's, and therefore states like MA do not recognize my state residency and force me to become a resident during our duration there).
As a military spouse, you are not forced to change your residency to the state in which you live. You may need to change it to match that of your military spouse (depending on the state requirements). This is according to the Military Spouses Residency Relief Act. https://www.army.mil/article/32879/new_law_means_spouse_can_claim_same_home_state_as_servicemember
 

afgirl3

Member
As a military spouse, you are not forced to change your residency to the state in which you live. You may need to change it to match that of your military spouse (depending on the state requirements). This is according to the Military Spouses Residency Relief Act. https://www.army.mil/article/32879/new_law_means_spouse_can_claim_same_home_state_as_servicemember
Yes, in the case of MA, they would only recognize my state of residency if it matched my wife's. Given I have never lived in her state of residency, I could not make a claim to be a resident. Also, given their taxes, it isn't a state I am keen on becoming a resident of anyways (and I say that as formerly being a CA resident!)...but it doesn't tax her as active duty so she has no incentive to change. We are waiting for an assignment where we can both change residencies to a place mutually beneficial so I can have full protection under the Relief Act.
In the meanwhile, how do our differing (and in my case, changing), state residencies change the way an LLC would be taxed?
 

Find the Right Lawyer for Your Legal Issue!

Fast, Free, and Confidential
data-ad-format="auto">
Top