Expert: Mike Fortunato - 9/20/2009

Question
Hi
I have 16 units I just acquired over the last 9 months (7 unit, 4 unit, 2 unit, 3 single family homes) for the purpose of rentals. I live in Maine

My question is around LLC formation.  My wife and I own the properties JTWROS. My understanding is that once we form an SCORP or LLC we'll quit claim the props over to the LLC.  However ... I want to keep things simple as possible.  If I add my wife as a member to the LLC doesn't it affect the tax status (partnership) and might htere also be some surprises? We are both signers on the mortgages by the way.  

My accountant suggested scorp because it's more "time tested" but I haven't read much good about this tactic re realestate rentals due to loss pass thru limitations, etc.

My wish is to keep it simple, effective, and no surprises.  In other words, if we decide to sell in a few years I don't want there to be tax implications that wouldn't have existed keeping everything owned by us personally.  Also, I've heard that entities can affect being able to do a 1031 exchange???

thanks very much!
Ken

Answer
You'll need the advice of a tax attorney on this, but many investors choose LLC's to hold their investment properties. In your situation, I doubt a partnership entity would be the best choice. An s-corp is a possibility, but in order to make a determination and consider the tax consequences, you would need to take a look at your entire financial picture to choose the best option. Transferring the properties into either one of those entities shouldn't trigger any additional tax liabilities, or jeopardize your asbility to do a 1031 exchange, if the transfer is done correctly.

Wish I could help more, but the implications are serious enough that you really should discuss your entire financial situation with a tax attorney or CPA to explore the choice that is best for you and your wife.