2 Issues With The Transfer of Property To an LLC – Video
Speaker 1: Whatever you can share with us in the gray area of moving properties from in our personal name into an LLC?
Speaker 2: Okay, you guys love this topic.
Moving properties from your personal name into an LLC, tax-wise, it’s not an issue, income tax-wise, you got a couple of issues. A, is it a property in California which by definition isn’t going to cash flow. Does it retrigger– What do you guys call it? The Proposition 13, was it? Does it retrigger your property taxes? There are other states that have analogs to that, so you want to check the local property taxes. Most states, it’s not a problem. In some, it can be.
The real two issues moving to an LLC from your personal name. A, insurance, make sure that the LLC becomes a covered party under insurance because if it’s in an LLC, you forgot to change the insurance, the insurance company is gonna argue that, “Hey, the owner didn’t buy insurance with us. Sorry.” Usually, you just add them as an additional insured is usually the way to do it.
Second, you got the due on sale clause. All bank contracts– I’m sure someone could show me an exception, they are few and far between. Most banks have something in their loan. Logically enough because when I draft loan documents, I put it in mine. That if the title transfers for any reason, we get to call a loan due. Now, as a practical matter, will most banks call a long due? No, as a practical matter, but sometimes, it happens or sometimes what they’ll do is they find out about the transfer and then they’d say you’ve got to put it back in your name.
Once in a blue moon, the bank will say, “Yes, we’re foreclosing.” Makes no sense, but remember these are bureaucrats. Logic has nothing to do with the process. If somebody wrote on a piece of paper or on a flow chart or some regulator said, “This is what you must do.” Your only real risk is due on sale.
There are a couple of ways to approach it. Most people just don’t tell the bank and by the way, if the bank learns of it, it usually is because of some insurance issue, almost invariably, that’s how they find out. What’s the downside to that? Let’s say interest rates go way up, which given what we’re doing with the printing press is at some point, in fact, the government is probably disappointed that inflation hasn’t occurred yet and that has to do with velocity of money, and how the money is hitting the economy or not at all. If and when the interest rates go up, now the bank has an excuse to call your low-interest rate loan due. You’re trading one risk for another.
Is it worth having an LLC, given the due on sale risk? That’s a real subjective question. Real subjective. Now, if you have commercial loans, it’s not usually a problem. If it’s a commercial loan, the interest rate’s a bit higher than a loan that’s in your name. Usually if it’s a commercial loan, you can put it into an entity or the bank will allow you to or if you refile, it’ll go commercial. Just understand you’re paying the extra interest which even a one point difference in interest, let’s say you got a million bucks’ worth of properties, not equity, but just a million bucks total, one percent on that is a lot, so you got to think about do you want to run the risk or not?