I want to form an LLC as a family partnership that presently holds the mortgage on a beach rental property. I have been told the house/land asset will transfer automatically with the registration of the owners in a PA LLC. I have checked and the mortgage holder has no stipulations regarding the formation of a corporate entity in their note. I need to know if the asset will transfer without risking tax implications?
Generally, assets do not just transfer to an LLC on formation. If you want to transfer real property you generally will need to transfer the deed to the LLC. This transfer may not be allowed under the lending documents and may trigger a due-on-sale clause. Moreover, this transfer may trigger a taxable event for the members.
As for this LLC, you must have a clear operating agreement. I discussed the importance of operating agreements here http://www.avvo.com/legal-answers/my-boyfriend-wants-to-add-me-to-his-business--how--132716.html.
You should speak with a local attorney regarding your issue. Contact people you know and trust for referrals. If you have no referrals, contact your local bar association for their referral program. Good luck.
DISCLAIMER—This answer is for informational purposes only and discusses general legal principles, trends, and considerations and is not intended as specific legal advice regarding your question. This answer does not establish an attorney client relationship. For legal advice, you should retain legal counsel in your state for advice regarding your specific circumstances.
It does not sound like there will be an automatic transfer. It will probably require a deed to transfer the property from the name of the individuals who own it to the LLC. You also might want to check the mortgage, not just the note, to make sure that there are no prohibitions on transferring the property into an entity. Furthermore, especially if you are concerned about tax implications, you should consult with a lawyer, since your scenario raises the possibility of realty transfer tax. Realty transfer tax can be imposed even on transfers of real estate from individual LLC members to the LLC.
In addition to your exposure for local transfer tax on this transfer, you need to also work with the estate tax planning implications. If you are setting up this LLC as a family limited partnership you need to be aware that the IRS has been extremely active in contesting these transactions. You need to have an experienced estate planning attorney guiding you and being involved in the structuring of this strategy. If not, you are a tax lawsuit waiting to happen.
Mr. Fromm is licensed to practice law in PA. The response herein is not legal advice and does not create an attorney/ client relationship. The response is only in the form of legal education and is intended to only provide general information about the matter within the question. Oftentimes the question does not include significant and important facts and timelines that if known could significantly change the reply or make such reply unsuitable. Mr. Fromm strongly advises the questioner to confer with an attorney in their state in order to ensure proper advice is received.
By using this site you understand and agree that there is no attorney client relationship or confidentiality between you and the attorney responding. This site should not be used as a substitute for competent legal advice from a licensed attorney that practices in the subject area in your jurisdiction and with whom you have an attorney client relationship. The law changes frequently and varies from jurisdiction to jurisdiction. The information and materials provided are general in nature, and may not apply to a specific factual or legal circumstance described in the question or omitted from the question.
Circular 230 Disclaimer - Any information in this comment may not be used to eliminate or reduce penalties by the IRS or any other governmental agency.