ManVsTax wrote:I think something is getting lost in translation. This fact pattern doesn't make a lot of sense based on what has been conveyed.
That is: The house is titled in mother's name and owned by her. The LLC obtained a loan and used the house as collateral.
Why did the bank accept as collateral an asset that isn't owned by the LLC or any of the owners of the LLC? Is mom an owner of the LLC or a party to the loan?
Yeah. It didn't make much since to me that way either. I talked to the client again, and got some clarification. I'm going to lay it all out again in an effort to not be so confusing (for myself too). I think I understand what they are doing from a legal prospective, but still not sure exactly how the whole thing will be handled tax-wise.
The mother owns this property (which is currently rented). She was unable to handle it herself, needed repairs done on the house, and could not get a loan on her own. The three siblings formed the LLC to get the loan and manage the property. The mother is not part of the LLC or a party to the loan. The bank allowed the loan, with the house as collateral, by means of a contract of sale that said the mother would not sell the house to anyone else, and the deed would pass to the siblings (LLC) upon her passing.
The contract also says that in the meantime, the LLC is responsible for managing the property. Any annual positive rental profit after all expenses and debt service goes to the LLC (as well as any losses). The contract also stipulates that LLC provides deed holder (the mother) with an annual statement showing all income / expenses for her tax return.
This is pretty much right out of the contract. If anyone has any input on the best way to treat this, I would greatly appreciate it. This is definitely a new one for me. If I need to I can start a new thread, as I wasn't real clear about what was going on at the start of this one. Thanks!