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My mother's house was previously in a qualified residence trust.  Per terms, the trust ended and ownership passed to her children.  She now pays fair market rent to us.  There is no mortgage.  For convenience, the children formed an LLC to hold the deed, collect the rent, and pay the bills.  Any remaining income after expenses is split by the children (the LLC owners).  Basically we're each netting out a few thousand per year, while sitting on this million dollar asset until mom passes.  

We're thinking of taking a mortgage to make use of some money now.  Hypothetically, borrow half the value of the house, creating a tax deduction for the interest.  Mom's rent payments (this is essentially a rental property) will cover the debt service on the mortgage.  Essentially we'd be "cashing out" half our inheritance now, then selling the house on her death for the rest.  Is this possible?  Advisable?  What are the potential pitfalls?

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The substantial assets are not necessarily liquid.  Still, it's not a need.  It's an idea, a thought about how to better... (more)

RBirns (Jan. 26, 2017 @ 12:57p) |

Uhm... the house is owned by the LLC and rented out to a tenant. There's no step up in basis upon death of a tenant. May... (more)

scripta (Jan. 26, 2017 @ 6:36p) |

Insurance fraud not suggested yet?

Mickie3 (Jan. 27, 2017 @ 9:41a) |

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RBirns said:   Is this possible?
  Depends on the lender, but most likely yes since the house is paid off.
RBirns said:   Advisable?
  Sure, if you think you can make better use of the cash over the interest paid for the cashout along with the risks.
RBirns said:   What are the potential pitfalls?
Housing prices plummet and you can't pay the mortgage, forcing a sale at sub-optimal prices or worse, a foreclosure.
Disagreements or lack of cooperation among siblings.
Changes in the financials of the LLC.
Investing in H&B isn't quite what you make it out to be.

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IF the house is owned by a LLC, then the 'LLC' will have to make the application.
That brings some fun complexity to the table. (As well as some income checks)

I wonder if a reverse Mortgage is better because it's paid off?

Edit : Changed 'Trust' to 'LLC'

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forbin4040 said:   IF the house is owned by a trust, then the 'Trust' will have to make the application.
That brings some fun complexity to the table. (As well as some income checks)

I wonder if a reverse Mortgage is better because it's paid off?

  
As I said in the op, the house is no longer owned by the trust.  The trust ended, ownership passed to the children.  It's now owned by an LLC formed/owned by the children.

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speedracer714 said:   
RBirns said:   Is this possible?
  Depends on the lender, but most likely yes since the house is paid off.
RBirns said:   Advisable?
  Sure, if you think you can make better use of the cash over the interest paid for the cashout along with the risks.
RBirns said:   What are the potential pitfalls?
Housing prices plummet and you can't pay the mortgage, forcing a sale at sub-optimal prices or worse, a foreclosure.
Disagreements or lack of cooperation among siblings.
Changes in the financials of the LLC.
Investing in H&B isn't quite what you make it out to be.

  
What's H&B?

Thanks for the pitfalls.  Paying the mortgage and financials of the LLC are not much of a concern.  Only borrowing half the value, and mom and kids have substantial assets besides this house.  Disagreements among siblings is intriguing.  How might that present a problem?

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you're not going to be able to get a conforming cash-out mortgage on a house owned by a LLC.

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RBirns said:   What's H&B?

Thanks for the pitfalls.  Paying the mortgage and financials of the LLC are not much of a concern.  Only borrowing half the value, and mom and kids have substantial assets besides this house.  Disagreements among siblings is intriguing.  How might that present a problem?

  Hookers and Blow are complimentary basket of goods, used to calculate the purchasing power of a currency. Do they teach nothing to the mass-affluent?

- All owners of the LLC might have to personally guarentee the debt, which might not make people happy.
- Fractional ownerships are Hell. Someone's ex-son in law, will start making ultimatums and drama because he owns 9% stake of the LLC,
- These things get emotional VERY quickly. (I don't want to sell the home where mom and I made Christmas Cookies, I own 9% of that grandfathers clock, etc)
- Any right of first refusal?

Seriously, it seems like people want to cash out and get the inheritance while mom's living in it, and the more complicated you make it, the more lawyers get paid.
Look long term at this, where people aren't making rational decisions, and this might be a disaster in the making.

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RBirns said:   Mom's rent payments (this is essentially a rental property) will cover the debt service on the mortgage. 
 

Not sure how you can assert this, without knowing the rate, duration or terms of the potential mortgage that you don't even know is possible.

Hint: Terms will not be great. Will be commercial.

Sidebar: why is the LLC more convenient than just sharing ownership?
Sidebar2: are you seriously charging your mom rent? I assumed that it was just "for tax purposes" and you arent actually charging her, but then you said you're netting a few thou a year... 

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You're going to have to deed it out and deed it back in after transaction in order to get a Fannie Mae or Freddie Mac loan.

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caterpillar123 said:   You're going to have to deed it out and deed it back in after transaction in order to get a Fannie Mae or Freddie Mac loan.
  Trying to weave that in with all the other issues presented above .... popcorn time!

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RBirns said:   We're thinking of taking a mortgage to make use of some money now.  Hypothetically, borrow half the value of the house, creating a tax deduction for the interest.  
  So you want to spend $1 on interest to save 35 cents on taxes. Yea, that makes sense.

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atikovi said:   
RBirns said:   We're thinking of taking a mortgage to make use of some money now.  Hypothetically, borrow half the value of the house, creating a tax deduction for the interest.  
  So you want to spend $1 on interest to save 35 cents on taxes. Yea, that makes sense.

  I laugh every time someone is willing to spend on interest to qualify for tax deduction!

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Kinasharma01 said:   atikovi said:   RBirns said:   We're thinking of taking a mortgage to make use of some money now.  Hypothetically, borrow half the value of the house, creating a tax deduction for the interest.  So you want to spend $1 on interest to save 35 cents on taxes. Yea, that makes sense.I laugh every time someone is willing to spend on interest to qualify for tax deduction!And I laugh every time someone thinks that borrowing 500K at an effective rate of < 3% isn't a deal of a lifetime!

OP never said they're doing it to get the tax deduction. They're cashing out half of their inheritance. The tax deduction is just an added benefit.

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Sounds like mom may now be poor and without significant assets, which might qualify her for all kinds of financial assistance, including subsidized housing. So the kids are collecting fair market rent, part of which is covered by Section 8 (is this still allowed?) and maybe they give the rest back in other ways.

Otherwise it sounds like a raw deal for mom.

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scripta said:   Sounds like mom may now be poor and without significant assets, which might qualify her for all kinds of financial assistance, including subsidized housing. So the kids are collecting fair market rent, part of which is covered by Section 8 (is this still allowed?) and maybe they give the rest back in other ways.

Otherwise it sounds like a raw deal for mom.

  
No, mom is quite wealthy.  Fair market rent is required under the rules of the qualified residence trust.  Those rent payments also further reduce her estate, beyond the annual gift exclusion.

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solarUS said:   
RBirns said:   Mom's rent payments (this is essentially a rental property) will cover the debt service on the mortgage. 
Not sure how you can assert this, without knowing the rate, duration or terms of the potential mortgage that you don't even know is possible.

Hint: Terms will not be great. Will be commercial.

Sidebar: why is the LLC more convenient than just sharing ownership?
Sidebar2: are you seriously charging your mom rent? I assumed that it was just "for tax purposes" and you arent actually charging her, but then you said you're netting a few thou a year... 

  
Rent payments will be more than enough to cover the mortgage, or else rent will be raised.  The rent is essentially a gift to the kids anyway,  If loan terms are bad, we won't do it.

Sidebars: Shared individual ownership would require separate rent payments to each person, and separate expense checks from each person, every time.  As stated above, fair market rent is required under tax laws of the qualified residence trust.

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RBirns said:   Basically we're each netting out a few thousand per year, while sitting on this million dollar asset until mom passes.  
  Sounds a little creepy. As if you're waiting around until she dies, then you can cash in.

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scripta said:   
Kinasharma01 said:   
atikovi said:   
RBirns said:   We're thinking of taking a mortgage to make use of some money now.  Hypothetically, borrow half the value of the house, creating a tax deduction for the interest.  
So you want to spend $1 on interest to save 35 cents on taxes. Yea, that makes sense.

I laugh every time someone is willing to spend on interest to qualify for tax deduction!

And I laugh every time someone thinks that borrowing 500K at an effective rate of < 3% isn't a deal of a lifetime!

OP never said they're doing it to get the tax deduction. They're cashing out half of their inheritance. The tax deduction is just an added benefit.

  
This.  

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atikovi said:   
RBirns said:   Basically we're each netting out a few thousand per year, while sitting on this million dollar asset until mom passes.  
  Sounds a little creepy. As if you're waiting around until she dies, they you can cash in.

  

I can see that, but no, not at all.  Just part of overall financial planning.  Thankfully mom should be around a long time, perfect health, and we don't need her money.

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Agree wholeheartedly. There's nothing creepy about everyone working together to maximize their benefits. Too bad more families can't seem to figure this out and work together instead of fighting over the assets.

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atikovi said:   
RBirns said:   Basically we're each netting out a few thousand per year, while sitting on this million dollar asset until mom passes.  
 

  Sounds a little creepy. As if you're waiting around until she dies, they you can cash in.
 

  

a "little creepy"?  WTF?   More like it passed being creepy long ago and is now approaching the "vultures are circling the carcass" stage now.  



 

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RBirns said:   Hypothetically, borrow half the value of the house, creating a tax deduction for the interest. 
 

I'm sorry, but exactly WHAT tax deduction are you talking about? The homeowner mortgage interest exclusion? That's only applicable to owner-occupied primary residences, so it naturally won't qualify.

Or do you mean the LLC will incur losses that can be applied toward the rent you're getting, thereby reducing your distributions from the LLC? I suppose, but you'll need that money to make more than probably 6%, which is about what a commercial lender will charge you for that loan. That is if you are trying to actually not lose money in the deal.

there are also some special tax rules about moving property into and out of an LLC that could have potentially significant effects on your estate tax liability later. I would talk to a tax attorney or good CPA.

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No one has mentioned insurance. I sure hope mom and the LLC aren't relying on a homeowners policy

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RBirns said:   
atikovi said:   
RBirns said:   Basically we're each netting out a few thousand per year, while sitting on this million dollar asset until mom passes.  
  Sounds a little creepy. As if you're waiting around until she dies, they you can cash in.

  

I can see that, but no, not at all.  Just part of overall financial planning.  Thankfully mom should be around a long time, perfect health, and we don't need her money.

  Then don't do anything.

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solarUS said:   
RBirns said:   Hypothetically, borrow half the value of the house, creating a tax deduction for the interest. 
I'm sorry, but exactly WHAT tax deduction are you talking about? The homeowner mortgage interest exclusion? That's only applicable to owner-occupied primary residences, so it naturally won't qualify.

Or do you mean the LLC will incur losses that can be applied toward the rent you're getting, thereby reducing your distributions from the LLC? I suppose, but you'll need that money to make more than probably 6%, which is about what a commercial lender will charge you for that loan. That is if you are trying to actually not lose money in the deal.

there are also some special tax rules about moving property into and out of an LLC that could have potentially significant effects on your estate tax liability later. I would talk to a tax attorney or good CPA.

    
Interest on a rental property is a deductible expense.
 

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wilesmt said:   No one has mentioned insurance. I sure hope mom and the LLC aren't relying on a homeowners policy
  
LLC holds a dwelling policy, mom has her own renter's policy for contents and liability.

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RBirns said:   
solarUS said:   
RBirns said:   Hypothetically, borrow half the value of the house, creating a tax deduction for the interest. 
I'm sorry, but exactly WHAT tax deduction are you talking about? The homeowner mortgage interest exclusion? That's only applicable to owner-occupied primary residences, so it naturally won't qualify.

Or do you mean the LLC will incur losses that can be applied toward the rent you're getting, thereby reducing your distributions from the LLC? I suppose, but you'll need that money to make more than probably 6%, which is about what a commercial lender will charge you for that loan. That is if you are trying to actually not lose money in the deal.

there are also some special tax rules about moving property into and out of an LLC that could have potentially significant effects on your estate tax liability later. I would talk to a tax attorney or good CPA.

    
Interest on a rental property is a deductible expense.

  For the LLC, but not each of you individually.

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Mickie3 said:   
atikovi said:   
RBirns said:   Basically we're each netting out a few thousand per year, while sitting on this million dollar asset until mom passes.  
  Sounds a little creepy. As if you're waiting around until she dies, they you can cash in.

  

a "little creepy"?  WTF?   More like it passed being creepy long ago and is now approaching the "vultures are circling the carcass" stage now.  



 

  It's not like they are picking Mom's bones while she's still alive.  She's actively involved in the estate planning and working to minimize her liabilities while maximizing what's she can pass on to her kids.    I'm sorry, but that seems more like responsible management than creepiness. 
 

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RBirns said:   No, mom is quite wealthy.  Fair market rent is required under the rules of the qualified residence trust.  Those rent payments also further reduce her estate, beyond the annual gift exclusion.The last part is only necessary if her estate divided by the number of children exceeds the lifetime gift exclusion.
forbin4040 said:   RBirns said:   Interest on a rental property is a deductible expense.For the LLC, but not each of you individually.Is there any difference as far as taxes go? LLC is a pass-through tax entity, so isn't LLC not paying tax on some amount the same as LLC owners not paying tax on that amount?

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drodge said:   
Mickie3 said:   
atikovi said:   
RBirns said:   Basically we're each netting out a few thousand per year, while sitting on this million dollar asset until mom passes.  
  Sounds a little creepy. As if you're waiting around until she dies, they you can cash in.

  

a "little creepy"?  WTF?   More like it passed being creepy long ago and is now approaching the "vultures are circling the carcass" stage now.  



 

  It's not like they are picking Mom's bones while she's still alive.  She's actively involved in the estate planning and working to minimize her liabilities while maximizing what's she can pass on to her kids.    I'm sorry, but that seems more like responsible management than creepiness. 
 

  

Its not?    Charging Mom rent on a house she gave them is not, eh?    Guess on that ethical issue, we just agree to disagree.



 

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You'll need to get a commercial loan for your LLC.

It can be done, but terms won't be as great.

Best I've gotten is usually a 15 year note, with rates fixed for 5 years, and variable after that. Rates are about 1.5-2% higher than a regular conforming, owner-occupied loan. (Last one I did was 4.75% on a 15 yr term. Fixed for 5 years.)

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Mickie3 said:   drodge said:   It's not like they are picking Mom's bones while she's still alive.  She's actively involved in the estate planning and working to minimize her liabilities while maximizing what's she can pass on to her kids.    I'm sorry, but that seems more like responsible management than creepiness. Its not?    Charging Mom rent on a house she gave them is not, eh?    Guess on that ethical issue, we just agree to disagree.I think you're missing the point here -- they're just transferring assets from parents to children while avoiding some taxes. I'm guessing mom is/was worth north of 11 mil (or 5.45 * number of children).

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Yes, this is possible but you do not want to get a mortgage for the LLC.  That is a commercial loan with much less favorable terms than a residential mortgage would provide.  I would have advised you to have put the house in a trust for tax and deed transference purposes because you can get a residential mortgage as a trust but not as an LLC.  The most expedient way to get this done, assuming you have trust in your siblings and one or more of you have the credit, is to quit-claim the deed from the LLC to one or two of the parties, go get a cash-out refinance on your investment property, and then transfer the property back into the LLC after closing.  All of this is perfectly legal and the fastest way of accomplishing your stated goal.  If you do not have a ton of trust in your siblings then I would go the trust route but I am not an attorney so I would advise you seek out a family law attorney that can help you manage this process.  Once you have it in a trust you will have many of the same protections of the LLC while having much more flexibility when it comes to financing the property.  

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Mickie3 said:   
drodge said:   
Mickie3 said:   
atikovi said:   
RBirns said:   Basically we're each netting out a few thousand per year, while sitting on this million dollar asset until mom passes.  
  Sounds a little creepy. As if you're waiting around until she dies, they you can cash in.

  

a "little creepy"?  WTF?   More like it passed being creepy long ago and is now approaching the "vultures are circling the carcass" stage now.  



 

  It's not like they are picking Mom's bones while she's still alive.  She's actively involved in the estate planning and working to minimize her liabilities while maximizing what's she can pass on to her kids.    I'm sorry, but that seems more like responsible management than creepiness. 

  

Its not?    Charging Mom rent on a house she gave them is not, eh?    Guess on that ethical issue, we just agree to disagree.



 

  
Mom didn't give them the house.  They assumed ownership at the end of the term of a qualified residence trust.  Fair market rent is a legal requirement.

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robotimothysmith said:   Yes, this is possible but you do not want to get a mortgage for the LLC.  That is a commercial loan with much less favorable terms than a residential mortgage would provide.  I would have advised you to have put the house in a trust for tax and deed transference purposes because you can get a residential mortgage as a trust but not as an LLC.  The most expedient way to get this done, assuming you have trust in your siblings and one or more of you have the credit, is to quit-claim the deed from the LLC to one or two of the parties, go get a cash-out refinance on your investment property, and then transfer the property back into the LLC after closing.  All of this is perfectly legal and the fastest way of accomplishing your stated goal.  If you do not have a ton of trust in your siblings then I would go the trust route but I am not an attorney so I would advise you seek out a family law attorney that can help you manage this process.  Once you have it in a trust you will have many of the same protections of the LLC while having much more flexibility when it comes to financing the property.  
  
Interesting.  So, hypothetically, the LLC quit-claims the deed to me and perhaps a brother.  We take a mortgage, then transfer the house back to the LLC.  Now we are holding a mortgage in our own name, on a property we no longer own personally.  Is that even possible?  More importantly, how do the other siblings get any money?

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The quit claim to a non relative (LLC is not your relative) should incur a ton of Taxes.
The quit claim back to the non relative should incur more Taxes.

Sounds like lots of fun.

How about you just give some money to some of the siblings and take them off the LLC?

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robotimothysmith said:     The most expedient way to get this done, assuming you have trust in your siblings and one or more of you have the credit, is to quit-claim the deed from the LLC to one or two of the parties, go get a cash-out refinance on your investment property, and then transfer the property back into the LLC after closing.  All of this is perfectly legal and the fastest way of accomplishing your stated goal.
 

"legal" yes

and workable...until the mortgagee finds out about the transfer and demands the balance due in full. 

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solarUS said:   
robotimothysmith said:     The most expedient way to get this done, assuming you have trust in your siblings and one or more of you have the credit, is to quit-claim the deed from the LLC to one or two of the parties, go get a cash-out refinance on your investment property, and then transfer the property back into the LLC after closing.  All of this is perfectly legal and the fastest way of accomplishing your stated goal.
"legal" yes

and workable...until the mortgagee finds out about the transfer and demands the balance due in full. 

  And of course the real fun starts when the person you 'Quit Claimed to' Stops taking all your calls and sells the house from under the others.

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kind of a sidebar...

if an LLC pulls equity out of its property, aren't the funds distributed to the members IN THAT YEAR and therefore taxable in full?

Skipping 12 Messages...
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Insurance fraud not suggested yet?

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