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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3988
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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I have a piece of rental property with losses built up on our

Resolved Question:

I have a piece of rental property with losses built up on our 1040 Sch E for improvements on farm and barns. The property is starting to make income this year. My husband wants to set up an LLC to defer any liability from rental properties away from our personal residence. I am looking into the LLC but also read a lot of info on a Delaware Business Trust. Is the only real difference between an LLC and a DBT, the 1031 exchange available on the DBT? It is more expensive to maintain DBT compared with LLC on the annual registered agent fees. Also the DBT must file 1041 while the LLC single member does not have to file 1065 form. Is one entity better than the other?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

NPVAdvisor :

The LLC is a hybrid between a corporation and a partnership, so yes, it provides the liability protection of a corporation with the flexibiity of a partnership (creditors and lawsuits can only come after LLC assets NOT your personal assets ... but you ar right in thinking that there are special considerations for LLCs and 1031 exchanges ... IRC Section 1031(a)(2)(D) specifically prohibits the exchange of partnership interests. However, both an LLC or partnership (or any other entity for that matter) can do a 1031 exchange on the entity level, meaning the entire partnership relinquishes a property and the entire partnerships stays intact and purchases a replacement property

NPVAdvisor :

.

NPVAdvisor :

So the LLC CAN do the 1031, but problems arise when different owners want to go different ways, so it muct do the 1031 exchange AS the LLC

NPVAdvisor :

.

NPVAdvisor :

Now, another wrinkle...

NPVAdvisor :

If this is a one member LLC (where the IRS disregards XXXXX XXXXX for tax purposes, rather than it being taxed as a partnership), the 1031 is no prolem at all, becuase it is really the same as the individual (the single member) doing a 1031

NPVAdvisor :

.

NPVAdvisor :

Now the DBT does the exact same thing as the LLC, in terms lf liability protection ... Creditors and lawsuits can only come against the DBT itself, not the grantors or beneficiaries personal asstes

NPVAdvisor :

and since a 2004 revenue ruling the DBT can now do 1031 exchanges too

NPVAdvisor :

I really think that the LLC, where there is one member, will be MUCH simpler administratively ... the business simply does a schedule C and attaches to the 1040, can do a 1031 exchange since the entity is a complete passthrough, no K-1s for example

NPVAdvisor :

the profits r losses just flows to line 12 of the 1040 (business income or loss)

NPVAdvisor :

but, again that liability protection is still there

NPVAdvisor :

(I'll get to the pluse and minus of DBT's in a minute but one more thing on the LLC

NPVAdvisor :

If you DO want multi-members in then LLC, the it's still a passthrough, but there will be an agreement that states how the members share in profits, losses and capital gains and losses, ... you do a 1065 because no you're treated (FROM A TAX PERSPECTIVE) as a partnership, so yes, there a k-1s to take those profita and losses to the members' 1040s BUT

NPVAdvisor :

you still have the liability protection (because it's an LLC NOT an actual artnership ... just TAXED like a partnership)

NPVAdvisor :

.

NPVAdvisor :

Now the DBT

NPVAdvisor :

YEs, asset protection AS WELL

NPVAdvisor :

still a pass-through, meaning the income and loss flow through to personal returns

Customer:

Also I think I read that the DBT does not have to file owners names or property asset info with the state.

Customer:

So more private info maybe.

NPVAdvisor :

Yes, that would be true, although Delaware is one of the states where you can uses an "incorporator" and an agent to file fr the owners for corporations and LLCs as well

NPVAdvisor :

From a FEDERAL tax perspective....

NPVAdvisor :

single member LLC is disregarded and treated as a sole proprietor

NPVAdvisor :

Multi-member treated as a partnership (still haveing liabilityprotection, though, that a general partnership does not) , so dstill does a 1065 with k-1s sending the income tec to the members

NPVAdvisor :

The trust a pass though uses the k-1s very much like the partnership ... to pass throuigh to the ownership interests

Customer:

So sounds like the biggest difference is the filing info; otherwise they are similar. The registered agent fees are higher for DBT so I am trying to figure out what value comes with that entity. $500 vs. $100 per year.

NPVAdvisor :

Makes sense

NPVAdvisor :

I think you have it dow to the right cost benefit analysis

NPVAdvisor :

Let me list what some say are the benefits of the DBT...

Customer:

Do you actually know what info is filed in each instance? Owner/partner info and assets held by entity would be the filing info for LLC, right? What is the filing info for DBT?

NPVAdvisor :

The main advantage of a DBT is its flexibility. The trust agreement can set up whatever trustee rights and obligations are desirable and beneficial to the owners. There is also flexibility in setting up voting rights, which can be advantageous over other types of trusts or business organizations.

NPVAdvisor :

Since the trust is its own legal entity, it is protected from financial problems, such as bankruptcy, of one of the beneficial owners. This protects creditors of the trust, making it a more attractive investment for creditors
.


NPVAdvisor :

A DBT can protect the beneficiaries' assets and help to reduce taxes. For instance, the trust does not have to pay Delaware state income taxes on any income the trust earns, and there is no Delaware business franchise tax. A DBT can also reduce estate and gift taxes. While the DBT may be subject to federal taxes, the trust could qualify under a format, such as a Financial Asset Securitization Investment Trust or Real EstateInvestment Trust that might result in savings on federal taxes
.


NPVAdvisor :

Delaware Business Trusts do not have to be registered with any government agency, thereby giving its owners a level of privacy, a benefit that appeals to some taxpayers. The beneficiaries can manage, and in effect control, the trust by giving specific instructions to the trustees, without taking on personal liability.

NPVAdvisor :

Not required for the business trust at all ... let me see about the LLC What state are you in KY?

Customer:

Yup I read all that this morning. :) That part about protecting creditors would mean the mortgage bank on the farm rental property would have protection in the event that we personally went into bankruptcy, right? Would the mortgage have to be in the name of the trust to make that work?

Customer:

The farm is in KY. We live, right now in CA but may move to KY and keep second house in CA.

NPVAdvisor :

Yes and yes

NPVAdvisor :

Anything you want behind that 'veil" needs to be in the name of the trust or llc

NPVAdvisor :

there's really no difference there

Customer:

So the bank would actually be happy to have this setup because this farm bank would be more separated from our personal home bank.

NPVAdvisor :

also means that if any business creditors (or workers on the farm fall and sue, for example) they can only come after the trust OR LLC assets

Customer:

Yes that's want husband wants to be sure is in place.

NPVAdvisor :

Yep UNLESS, it's an underwriting issue and they don't think the farm and/or its operations can service the mortgage

Customer:

So there is no filing with the state for setting up DBT? Only file 1041 with federal govt.or our state income tax normal forms?

Customer:

or did you mean, surely, there is a form in the name of the trust. Wouldn't you have to file the name of the beneficiary on some form?

NPVAdvisor :

You have to have an attorney draw up the trust

NPVAdvisor :

And it will have to conform to truat law

Customer:

yea, I'm just wondering what public info is listed with the state for the DBT.

NPVAdvisor :

the delaware trust is a specific trust drawn by Delaware attorneys and recogniozed by the state of delaware

NPVAdvisor :

NONE

NPVAdvisor :

that's one of the biggest toutings of the Delaware business trust and it's froma combination of the fact that delaware doesn't require it and a trust is a separate legal entity

NPVAdvisor :

NOT necessarily a separate TAX entity (hence the k-1s) two different issues

NPVAdvisor :

It's organizd in Delawar

NPVAdvisor :

ALL business entity is state law

NPVAdvisor :

And every state has different laws as to what is allowed

NPVAdvisor :

by choosing a del business trust, you'r choosing to organizes in Delaware

NPVAdvisor :

sorry for all the typos, trying to get it in therem :)

NPVAdvisor :

KY won't know anything other than as KY residents, you'll probably pay income tax on what comes off the k-1s

Customer:

Ok, no info filed with state. Attorney draws up forms. Got it. Now have the core issue, I guess. So KY doesn't govern the trust and if there is a law suite by farm worker or horseback rider the whole thing is processed through Delaware

NPVAdvisor :

that's right ... they would be suing a Delaware Business trust

Customer:

Right, and there is no income so far because we have lot of losses for past improvements. Just this year starting to have income from rentals so will use up losses for a couple of years.

NPVAdvisor :

and delaware is one of the BEST plaes to be a business owner, when it comes to a body of law that protects business owners

NPVAdvisor :

yep, got it

NPVAdvisor :

You could also do a Delawae Corporation or LLC and it would work the same way

NPVAdvisor :

(BUT, you dont want the cost of a delaware corporation)

Customer:

except for the filing of owner info, right?

NPVAdvisor :

NO they allow for agent filing, I'm almost certain ... can you hang on a sec?

Customer:

yes

NPVAdvisor :

thx

Customer:

What, in you mind is the "cost of a Delaware corp"?

Customer:

Just the annual $200 right?

Customer:

and registered agent fee per year

NPVAdvisor :

sounds about right ... I can check that too

NPVAdvisor :

see this while i do

NPVAdvisor :

The Delaware PRIVACY Advantage:



  • Company ownership need not be disclosed to the State of Delaware.

  • Company ownership transfers need not be reported to the State of Delaware.

  • Delaware does not maintain a publicly available database of companies' management.

  • The reporting and disclosure obligations imposed by the State of Delaware are minimal.

Customer:

Can we add additional pieces of property to the trust or segregate out "series" or not like LLC?

NPVAdvisor :

stilll looking but see this (not trying to get you to do the LLC, just pointing out why DE is so popular of ALL business entities... if it's been done, Delaware has done it

NPVAdvisor :

  • Delaware is one of the least expensive states in which to form an LLC or corporation.

  • Delaware allows one individual to act as the shareholder, director, and hold all the executive offices.

  • Delaware LLCs and corporations can be headquartered anywhere in the world.

  • Aside from a registered agent address, owners are not required to maintain a physical address within the state.

  • Company records do not need to be physically located in the state of Delaware.

  • Stock can be transferred instantly and privately, without filing a public notice.

  • You do not have to be a US citizen to form a regular Delaware C corporation or LLC.

  • Delaware does not impose a minimum capital investment requirement for LLCs and corporations.

  • Delaware's Secretary of State office offers a wealth of information for managing your LLC or corporate standing.

  • Delaware LLCs and corporations offer generous protection (sometimes called indemnity) from personal liability.

  • Unlike most other states, Delaware corporations can easily be converted into LLCs and vice versa.

  • Delaware LLCs and corporations can be formed without coming to Delaware, using an online incorporator like The Delaware Company.

NPVAdvisor :

I know you've probably seen a lot f these, but it does serve as a good comparison chart for what the trust essential costs are (LLC and Corp)

Customer:

Can we add additional pieces of property to the trust or segregate out "series" in DBT/LLC or would need to do multiple entities per property?

NPVAdvisor :

recognition of separate series is one of the big selling points of the DBT

NPVAdvisor :

and an LLC can buy up as much of any type property as it wants

NPVAdvisor :

farms, collectibles cash

Customer:

Ok. That is big item on the list. Lots of flexibility. I would think we would want each property in a separate LLC.

Customer:

But we could h

Customer:

have all property in one DBT and have th

Customer:

em be separately protected for liability from each other?

NPVAdvisor :

Yep, now you're coming down to why the DBT may make more sense for YOUR intentions

Customer:

Ok, thank you so much. Very cool. I love your brain!

NPVAdvisor :

:)

Customer:

I'll be back in future, I'm sure.

NPVAdvisor :

that's great

NPVAdvisor :

I appreciate

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3988
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 2 other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.

Once again, Thanks!


Don't forget!

... "For Lane Only"...

Although, honestly, we have lots of very knowledgeable folks here.


Enjoyed working with you,

Lane

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