Transfer of rental property to LLC

[David]

Rental property is owned by TP and reported on Sch E. He wants to set up an LLC for rental properties and transfer this property to the LLC.

He also wants to make his son 50% member of the LLC.

Does he simply do a deed of transfer to the LLC? Does the mortgage have to list the LLC or can it stay in the TP's name?

Are there any tax ramifications to the son since he wasn't the original owner of the rental property and since the mortgage isn't in his name?

If the LLC is listed on the mortgage I would think that the TP may have relief of debt which will result in a taxable event.

Thanks.

[Terry D EA]

If I am reading your post correctly, this would be a new LLC and quite possible doesn't have the financial stability to take on a mortgage. With that said, the partner would be personally liable for the mortage and it would be listed as a recourse loan and added to the partner's outside basis. As for the son, is the father gifting him anything or is the son paying in any capital? There needs to be some type of transaction here to make it a partnership. A partnership is a pass thru entity and any income/loss would pass thru to the partner's at their specified percentages which is 50% in your case. The son would pay tax on any income that pass thru to him and will also report any loss that passes thru to him until his outside basis reaches zero. Hence the reason for the outside basis account and capital account. The mortage can stay in the TP's name and the only reflief would be if the partnership would purchase the property from him which by your post that doesn't look like it would happen.

[David]

The father already owns the rental property and has a mortgage on the property. He has been reporting the rental on his Sch E.

The father wants to son to have 50% ownership in the LLC. The son isn't contributing anything.

The rental property will be the only asset in the LLC.

[David]

Also, I thought one LLC member could contribute property and the other member doesn't have to contribute anything to an LLC. And unlike an S Corp. the members can determine the % each LLC member shares in profits and losses.

Can't they determine that each member has a 50% interest in profits and losses? But since the property is contributed by the father, can they still determine that each has a 50% interest in assets or does the father have to have a 100% interest in assets and the son zero % interest in assets?

Thanks.

[Terry D EA]

>>>Can't they determine that each member has a 50% interest in profits and losses?<<<

This type of proportioning is permitted and is determined by the partners. But if a partner has no basis, then he cannot share in the losses. Losses can only be taken up to the amount of the partner's outside basis. This is why I'm saying he needs to make some type of investment or the father gifts him something or 50% interest in the property.

[kcjenkins]

I agree with Terry, but think that since Dad's whole goal is gifting his son half of the property, if he's not in a big hurry, he could gift his son 20K a year of his interest in the property, 40K if the son is married and Dad is ok gifting them both, without tax on the gift.

[Terry D EA]

Well put KC and no doubt the best way or at least the most interesting way for the son to get started.

[michaelmars]

gift can also get a minority discount if the son is a limited partner with other restrictions as to transfer rights etc. other debts like tenant security deposits, might give the son some basis if he becomes liable for them. The bank might also add him or the LLC as a guanantee on the mortgage. The bank will also have to sign off on the transfer but any mortgage my clients have done in the last 10 years have the clause in it that then can transfer the building to an LLC and/or to family members as long as the original mortgagor stays personally liable.

[David]

Thanks, everyone for your help with this.

KC, you say the father can gift $20K with no tax impact. I thought the father could only gift $14K. The son is getting married this year. If the father decides to gift to both of them and keep the property in the LLC doesn't the daughter-in-law then have to be an LLC member?

I want to make sure I understand this correctly:

The gifting strategy is used if there is concern of the son having enough basis to take any losses. So if the property is generating income then the father can transfer the property to the LLC and the father and son determine that they both share equally in profits and losses. No gifting is needed.

Also, can they each have 50% interest in assets or since the father contributed the property then he has to be allocated 100% of assets and the son has no share of assets?

Thanks.

[kcjenkins]

David, you are right, the exclusion is 14K, not 20. And yes, if he wants to gift to both she should also be a member.