Author Topic: First time buyer looking at a house with partner - LLC vs no LLC  (Read 5513 times)

DumpTruck

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Me and my GF want to buy a house together as an invenstment. We currently rent but I am looking to move biking distance to my new office in Denver and she works from home. if we are going to live together I figure we can make a go at an investment together. I realize this can get sticky so I am planning contingincies out front.

Alignment on our goals are paramount and so far we are on the same page. I'll have a lawyer draft up a Tenants in Common document. (any suggestions in Denver?)

Question is, do we do it as an LLC or as an individual(s) on the mortgage. I don't know much about this so I probably sound dumb here and there but that's ok! Just blundering through some thoughts here:

LLC Pro/Con
We pay the LLC more than the mortgage so that it turns a "profit"
We can write stuff off that goes into the house (tools etc)
Not sure if when the house sells how the capital gain tax will work vs individual
Easily defined share holding of each investor


Individual Pro/Con
No tax on the capital gain
Don't have an LLC to dump write-offs into

What else am I missing?














dragoncar

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Re: First time buyer looking at a house with partner - LLC vs no LLC
« Reply #1 on: January 17, 2014, 02:24:18 PM »
If you will live there, I think the tax benefits of individual ownership are really good.  Not a tax expert, so looking forward to other responses.

Either way, you probably want a written agreement as you mention.

Thegoblinchief

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Re: First time buyer looking at a house with partner - LLC vs no LLC
« Reply #2 on: January 17, 2014, 04:28:50 PM »
Since you use the word "investment", I feel obligated to post this:

http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

(Still open in a tab from the last thread I posted the link in!)

If you really want to buy a house, do your research on what happens if the relationship sours and one of you wants out of the house.

Fuzz

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Re: First time buyer looking at a house with partner - LLC vs no LLC
« Reply #3 on: January 17, 2014, 05:50:26 PM »
I'm kind of confused by your plan for a couple reasons.

Are you generally against marriage, or do you think that buying a house with someone is less of a commitment than marriage? Are you borrowing money to do this? I tend to think that a 30-year mortgage is more of a commitment than a marriage, but I can see how reasonable minds differ.

Also, I'm not a tax lawyer, but I think that (1) the IRS would shut you down, unless you had some sort of way to prove that this was a bona fide investment. I'm not sure you could prove that. Your audit risk is not worth the reward. (2) The home interest deduction you get as a homeowner might be worth as much as whatever expenses you would deduct as a business. So just go for the homeowner deduction.

There is a fat wallet thread discussing this issue, but I'm not sure those guys know anything. http://www.fatwallet.com/forums/finance/259395/

I would look at this too: http://www.irs.gov/publications/p530/ar02.html

Also, I tend to think that if putting your residence into an LLC and then renting it to yourself was a surefire way to deduct a lot of expenses, then a lot of people would do it. But what do I know - this is just the Internet.

Also, why would you want to be tenants in common? Theoretically, the worst case under that scenario is your GF and you break up, and then she brings another person home, and you're legally unable to kick her out. Basically, neither of you can kick the other out in any circumstance. Plus if you die, your share of the house would go to her and not to your parents/offspring/siblings or whomever else you may want to inherit instead of her. I don't even think it would pass through probate. That could possibly have funky tax consequences for her too. I don't know.
« Last Edit: January 17, 2014, 05:54:11 PM by Fuzz »

Fuzz

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Re: First time buyer looking at a house with partner - LLC vs no LLC
« Reply #4 on: January 17, 2014, 06:00:57 PM »
Another thought about the tenants in common issue. My understanding is that if you spend $20K on a new roof or whatever, you both still own everything 50-50. So if you sold the house, you couldn't make her repay you for her share of the roof. There is no way to ever make the other person pay for their share of an improvement. Also, if you moved out and she still lived there, and you rented out a room, you would split that rental income 50-50 even though you're not there.  You should be planning on having the exact same financial future forever if you want to be a tenant in common - at least that's bar-prep common law.

disclaimer: not your lawyer; don't know you; don't know anything about Colorado law. but those are all good issues to go over with a colorado attorney that does property law.

DumpTruck

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Re: First time buyer looking at a house with partner - LLC vs no LLC
« Reply #5 on: January 29, 2014, 04:40:19 PM »
Sorry I didn't reply sooner to all these great bits of advice.

I realize houses are not always a good "investment"

No I'm not ready for marriage now or maybe ever. But I do like my GF and we seem to have level heads. Laying out all the foreseeable contingencies, even though unforeseeable would undoubtedly arise, is what I intend. Dealing with any other issues fairly and amicably seems attanable.

The reason I even am thinking about it is because... everyone is moving to denver. Rental rates are through the roof and I think I have a high probability of finding a flippable property and get tax free capital gain.

No way in hell am I looking to take 30 years to pay off a house if it didn't flip either.

I don't have the cash handy right now for down payment but she does. I want to take advantage of the market now instead of waiting for all the gentrification to already occur.

I am no way set on this. I'm fine continuing to rent. But it's tough because I want to do mods, I want chickens, I want to knock out a wall to join my living room and garage. I really just want to live in a garage lol.




$200k

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Re: First time buyer looking at a house with partner - LLC vs no LLC
« Reply #6 on: January 29, 2014, 06:14:52 PM »
Some additional thoughts to ponder:

1) If you form an LLC to hold title, who manages the LLC's decisions?  If you and the other member (GF) share management responsibilities, what happens if you deadlock or what if there is some intense disagreement down the road?  The operating agreement should address this, but even if it does, litigation seems likely.

2) If you take out a mortgage and then afterwards intend to throw it into the LLC, careful that you don't trigger the due on sale clause.  Same goes for title insurance; your coverage will lapse since the LLC is not the insured.

 

sparklebunny

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Re: First time buyer looking at a house with partner - LLC vs no LLC
« Reply #7 on: January 29, 2014, 07:28:38 PM »
I don't see any reason to own in an LLC. It's not actually an investment property so there isn't any asset protection to be had from using an LLC. Also you typically can't get a traditional mortgage for a poor petty owned by an LLC. You would have to get a business loan instead and the interest rate would be higher. I would purchase in your own name and work out how the down payment, and any other monies, will be returned if the relationship does not work out.

bikebum

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Re: First time buyer looking at a house with partner - LLC vs no LLC
« Reply #8 on: January 29, 2014, 08:56:58 PM »
Can one of you afford to buy the house on your own? Then the other could pay rent to the owner. Some people think that is weird, but it makes a lot of sense for some couples.

wtjbatman

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Re: First time buyer looking at a house with partner - LLC vs no LLC
« Reply #9 on: January 29, 2014, 10:06:01 PM »
Also, get it in writing and sign it with blood that your girlfriend thinks it's OK for you to knock down walls and "live in" your garage. I can't speak for all women, but most women probably wouldn't dig that. As a guy I wouldn't even dig that.

chasesfish

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Re: First time buyer looking at a house with partner - LLC vs no LLC
« Reply #10 on: January 30, 2014, 05:08:16 AM »
Can you afford the house yourself?  I really think pre-marriage, a resident house should be one persons or the others.  Then its really clear who has to move out.  If you think you're committed enough to own a house together, then you might as well get married.  That's a very married thing to do.

I bought my house before getting married and my future wife didn't care that she wasn't on the loan.  We never got into the "pay me x amount towards the mortgage as rent" because we got married shortly thereafter.

MandyM

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Re: First time buyer looking at a house with partner - LLC vs no LLC
« Reply #11 on: January 30, 2014, 06:42:59 AM »
I don't have the cash handy right now for down payment but she does.

First off, I think buying a house together is a terrible idea. At the base of it, a mortgage and a marriage are the same thing. if you aren't ready for one contract with the GF, you really aren't ready for the other.

Why doesn't she just buy the house and you pay her rent? This is how my boyfriend and I did it. Which made our break up "easy," financially speaking.

MustachianAccountant

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Re: First time buyer looking at a house with partner - LLC vs no LLC
« Reply #12 on: January 30, 2014, 07:25:48 AM »
I agree with everyone saying "if you're not ready to get married, you're not ready to buy a house together." I mean, really. You say you're "Laying out all the foreseeable contingencies, even though unforeseeable would undoubtedly arise, is what I intend." And in the next sentence, "Dealing with any other issues fairly and amicably seems attainable." Well, guess what? A foreseeable contingency is that, for whatever reason, in the future, you can't actually work out an issue fairly and amicably. And you know what's really bad for your finances? Lawyer bills to hash out an "unamicable" contract dispute.

One (more complicated) option to one person buying and the other paying rent is this:
One person buys.
Other person pays half the mortgage every month.
Have a signed document that, if the relationship sours, person 2 gets bought out by person 1. In other words, person 2 gets all the equity that they've put into the house.
Person 1 can take out a home equity loan in such a circumstance.

In this way, you're both accumulating equity in the house, but only one person officially owns it.

Disclaimer: I'm not a lawyer, so I don't know if this would work.

blackfedora

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Re: First time buyer looking at a house with partner - LLC vs no LLC
« Reply #13 on: January 30, 2014, 01:36:50 PM »
Just to add to the reasons this is a bad investment: there is a HUGE difference between modding and flipping a house. If you're flipping the house you want to stick to traditional floor plans and appliances regardless of how impractical they are. If you're living in a house you want to make the modifications that save you money and make your house more enjoyable FOR YOU. Attaching the living room to the garage is not something most buyers are going to go for.

Finally, you need to realize that you're proposing that you gamble with your girlfriend's money, the product of her labors. If something happens that shatters the neighborhood's resale value she could see years of work vanish because of something you suggested. Even if the house retains value, it's unlikely to grow at the market's historical rates. It would be dangerous enough if you were splitting the down payment, but with her taking the bulk of the initial risk you're just asking for the calamitous sort of break up that requires months of legal fees.

Your mortgage is hopefully the largest debt you will ever carry, and debt adds stress to any situation. Saying that you're not ready for marriage but you want to get a house together is like saying you're not ready to be a parent, but you'd like to raise your nephew while his mom is still active military.

somepissedoffman

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Re: First time buyer looking at a house with partner - LLC vs no LLC
« Reply #14 on: January 30, 2014, 02:54:58 PM »
Saying that you're not ready for marriage but you want to get a house together is like saying you're not ready to be a parent, but you'd like to raise your nephew while his mom is still active military.

I'm going to agree a little bit before I disagree:
Going splitsies with someone on a house if you're not exceedingly confident that you'll stay together is a bad idea.

BUT, if you've found your life partner, it's not weird to buy a house before getting married.  My girlfriend and I bought a house together, because it made sense from a financial and happiness perspective.  We will get married at some point, but it won't really change anything, and it sounds like a lot of work.  Also, I really like people's responses when I tell them we're not getting married until we pay off the house...

blackfedora

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Re: First time buyer looking at a house with partner - LLC vs no LLC
« Reply #15 on: January 31, 2014, 07:21:16 AM »
Saying that you're not ready for marriage but you want to get a house together is like saying you're not ready to be a parent, but you'd like to raise your nephew while his mom is still active military.

I'm going to agree a little bit before I disagree:
Going splitsies with someone on a house if you're not exceedingly confident that you'll stay together is a bad idea.

BUT, if you've found your life partner, it's not weird to buy a house before getting married.  My girlfriend and I bought a house together, because it made sense from a financial and happiness perspective.  We will get married at some point, but it won't really change anything, and it sounds like a lot of work.  Also, I really like people's responses when I tell them we're not getting married until we pay off the house...

That's fair, but I get the impression that OP is not ready for marriage in the sense that they're not ready for a lifelong commitment, which is the essence of being married. I understand that some people don't want to get married for political, personal, or religious reasons, but they still live functionally married lives.

I'm just saying that it's silly to in one breath say "I don't think I'm ready for a lifelong commitment" and with the next say "but I will totally sign a 30 year contract with this person". It's even more ridiculous to be thinking like this when you're not the one putting down the down payment. Based on what I've heard so far I think the OP should help their GF evaluate whether or not buying a place is a good idea right now FOR HER. If the answer is yes then she should buy a property in her name and charge OP rent. If later on they decide to get married or to merge assets further, great, the two of them will have that much more invested in the house already. If not, OP can move out same as if they were evicted from a normal renting situation.

Either keep your finances completely separate or work on a relationship that can last for life. Trying to live the married life and assuming "eh we can work it out, we're mature adults" if things get bad is trying to have your cake and eat it too.