Tax Implications - First 2-Family Rental Property

Question

My brother and I have opened up an LLC and have put an offer on our first 2-family for a rental. We have some questions on loans/tax implications for the business that we're hoping to get some feedback from others on.

• We are able to get a co-signed personal residential loan as an investment property. 20% down and 4.5% APR. Alternatively, we're able to get a loan against our LLC with us as personal garuntee's on the loan for 20-25% down and 5% APR. Besides the liability protection, how do these 2 options affect taxes?
• If we go the personal loan route, we can still run the management of the business through the LLC - again, interested in tax implications for this scenario if anyone does this.
• The personal real estate lender notes that you can deed the property to the LLC after purchase. However, the Lawyers seem to agree that this would void the mortgage because of the "Due on Sale" clause in mortgage loans. Found online:

Can I purchase an investment property and hold the property in an LLC or corporation for liability purposes? Fannie Mae and Freddie Mac do not allow for their loans to be closed in the name of an LLC or corporation. To get around this, many investors close initially with their names on the title and mortgage, then transfer the title into an LLC for liability protection. There are differing legal opinions as to whether the deed transfer triggers a “Due on Sale” clause which could void the mortgage, but in practice I have never seen this happen.

I've also had people tell me:

"As long as you do not transfer beneficial interest in the property, the due on sale clause does not get triggered. He cited the example of a parent putting their home in a trust for their children. If you and your brother buy the house and are the principles in the LLC, this would not come into play."

Who is right and who is wrong?

In general, we just want to be set up right and obviously with the minimal up front and ongoing costs, with the best tax implications at the end of the year.

Answer 1

You should really be talking to a tax adviser (EA/CPA licensed in your State) about taxes and to a lawyer about the liability protection. You won't find answers from neither of theses here.

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Besides the liability protection, how do these 2 options affect taxes?

There's no liability protection difference between the two (talk to a lawyer to verify) since you'll be cosigning them personally either way.

In the first case (loan to the LLC) - everything goes on the 1065 and you get the bottom line on K-1 which transfers to you own tax return. In the second case the loan interest is your personal investment expense (Schedule A deduction) while the loan proceeds you moved to the LLC add to your basis.

I'd suggest getting the loan directly in the LLC name, if you can.

However, the Lawyers seem to agree that this would void the mortgage because of the "Due on Sale" clause in mortgage loans.

"Due on sale" may or may not be invoked, but that's a risk you'd be taking, yes. LLC is a separate legal entity (as opposed to a living trust, to which your second quote seems to be referring), so it is definitely a possibility for a lender to call on the loan if you re-title it.