PA Real Estate kinks - Posted by Dave from PA

Posted by Ki Jar on October 07, 2002 at 16:43:13:

Because my goal is to be wealthy. I shall practice what the wealthy do for asset protection. I am insulating each of my properties with LLC (I am in GA by the way). I notice folks are making the statement that “TRUST PROVIDES NO PROTECTION”. I would like to point out that this is not true of all trust and one should specify the type of trust one is speaking of. Before there were LLC and and good LLP all there was for protection was IRREVOCABLE TRUSTs. Read 404 Page | R J Mintz This will help answer some of the asset protection questions. Hey it may even provide you with more questions for your attorney. And allow you to post back here for the rest of us when you’ve found a good solution.

PA Real Estate kinks - Posted by Dave from PA

Posted by Dave from PA on September 10, 2002 at 19:42:06:

Could any PA investors tell me about some of the kinks here in PA such as the non-assigning provision or incurring transfer tax using a trust, etc.

  • Dave

Re: PA Real Estate kinks - Posted by David Krulac

Posted by David Krulac on September 16, 2002 at 19:32:43:

I posted in early Sept. a summary of transfer tax on the main board.

I would be cautious of the Capital Stock Tax, which is a killer tax. It is not set up for real estate but rather companies that sell inventory. They calculate the value of your corp. as 10 times your profit. If you make $500,000 profit in one year, then you have an entity worth $5 million and you will pay on that $5million for then next 5 years. Even if that was the only asset you owned and took years to develop/realize that profit.

don’t try to incorporate out of state as you will be subject to a foreign franchise tax too.

Re: PA Real Estate kinks - Posted by Jeff M

Posted by Jeff M on September 16, 2002 at 16:49:46:

You should probably address your postings to “David Krulac”. he is in central PA, and is very knowledgeable on PA laws, but he is not a lawyer as far as I know.

As far as the transfer tax is concerned, if you buy in the name of “Dave or assignee”, then form the trust, and then have the trust be the actual buyer at settlement, there is NO TRANSFER from you to the trust, so no transfer tax is due. I have heard (but not confirmed)that, if you can prove to the state that you own 100% of the trust, they will exempt you from the tax even if you take tile in your name at first, and then transfer it to your trust. There is a booklet they will send you “Pennsylvania Realty Transfer Tax Act and Regulations April 1995” if you call them.

Anyway, I too am in PA (Phila suburbs), and new to this business of RE investing. I intend to buy and hold. I have read much concerning structures for this type of business, and keep hitting walls. The gurus here recommend the following, as I understand it:

  1. Buy each property in a separate Land Trust (privacy)
  2. Form a LLC or LP (LP in PA due to "capital stock charge on LLC’s here)to be the BENEFICIARY of the Land Trust, and appoint, as Trustee, someone who has a different last name than you, preferably who also lives out of state.
  3. In the case of an LP, form an S-corp or LLC act as General Partner of the LP, and that LLC/S-Corp owns 1% of the LP. This is done because the only “person” who has liability in a LP is the general partner they “take the hit” in a lawsuit).

I have taken this propeosed structure to 3 different RE attorneys in my area and they have UNANIMOUSLY told me that this is NOT the way to go in PA. They all say that the Land Trust is useless in Pennsylvania. They also disagree with the gurus in that while the gurus recommend 3-4 properties per LP, the lawyers I spoke with recommend 1 LP for as many properties as you buy, and 1 LLC/S-Corp as general partner. I have to tell you that the gurus’ structure makes more sense to me, and I think I understand their reasons, but it puts me in the position of arguing with the Attorney I am sitting with and trying to hire. That is an uncomfortable position for me to be in, since they know the law much better than I do!!! Where do I go from here??? I wish I knew! Good luck to you.

Jeff M

Trusts and asset protection… - Posted by David Krulac

Posted by David Krulac on September 16, 2002 at 19:48:17:

I posted in early Sept. prior to Sept 10 a summary of the transfer tax on the main board here.

thanks for the compliment.

IMHO trusts are oversold. They afford no asset protection and only provide anonomous dealings. i wrote a long time ago here about the use of fictitous names. according to an attorney it is NOT illegal to use a fictitous name unles used for fraud. therefore you can deed property in any name you want legally. You could deed the property in the name of John Smith.
It would make title searching very interesting to say the least. Englebert Humperdink would at least be easier to search.

Two easy ways to protect your assets without any new entity creations are:

  1. plenty of insurance including an umbrella policy, very cheaply priced too.

  2. heavily mortgaged properties. If you have little or no equity, you are not worth suing, just like a person who has nothing.
    LP or LLP do avoid the dreaded Capital Stock Tax, see my response above to Dave from Pa. While that solves some state tax issues there are still Federal Tax issues. The deed would be in the name of the LP, therefore they could be considered a dealer.

considerations should be given to what kinds of properties that you are buying. some properties are inheritantly more risky.

John Hyre has a very reasonable qualifier saying maybe 3 or 4 properties per llc/lp. you get some seperation but not the extra paper work/tax return/bank account/expense of having 55 llcS/lpS. The degree and layers of protection that you need are determined by your comfort level, your attorney and a whole buch of other factors, that I have just scratched the surface on. good luck.

David Krulac
Central Pennsylvania

Re: Trusts and asset protection… - Posted by Jeff M

Posted by Jeff M on September 16, 2002 at 20:29:00:

Thanks for the reply! I, personally, intend to buy many SFH’s to hold and rent for the long term mostly to lower income and possibly Section 8 tenants. Since I am not fliping, the dealer status doesn’t really apply in my situation. Second, I understand equity stripping, and plan to do that in the future, but, currently, I need cash-flow. I have cash in the bank, so borrowing from the bank, and paying 6% OR 7% while the bank only pays me 1% seems stupid. I would be paying the bank 5% or 6% for the “privledge” of lending me my own money. Anyway, I might consider doing a LOC on each of the properites, or having a friend file a lein against my property for money he “loaned” me.
The question about liability comes up for many reasons, not the least of which is the fact that some landlords are being sued for “mold problems” with their properties. As I understand it, no insurance covers this liability. If I don’t have a LL structure of some type, it is simply “ME” standing there naked against the claimant. I would have no insurance company defense lawyer, and would therefore be PERSONALLY liable. As far as I know, the umbrella doesn’t cover this either. I may be “seeing ghosts that aren’t there”, but I cannot afford to have my personal assets at risk to my RE investing business. I have not yet dealt with these tenants, so have no idea what they will be like. However, many of my fellow RE investor group do own these types of properties, and each of them have at least one story regarding a tenant who sued for one thing or another. These are infrequent occurances, but they do occur. That is what I am trying to prevent.
Again, thanks for the quick reply, and the insight. Good luck to you!

Jeff M