I am planning to buy a small parcel of land from a relative, that has no structure on it. It has been recommended to me that I form an LLC to buy the land. That it gives me financial protection against liability, as well as some tax advantages.

The cost of the land is under 20k. The cost of forming an LLC is probably over $500. Then I have the yearly cost of the LLC.

Eventually I play to build a vacation home on the land, which I might or might not rent out (VRBO). But that is years away.

Can yall tell me the pros and cons of going the LLC route?


[This message has been edited by Cagey and Swift (edited 11/8/2011 8:14p).]

I'm not a lawyer, so this is not legal advice. I do have a business that is an LLC, but rely on my CPA for the accounting. Below is how I understand things work.

Depending on who forms the company it will probably be about $500-$1K for legal formation and filing. You then have to get your federal tax ID and State Tax ID taken care of. Neither is hard or expensive and can be done by the internet. You will have to have this to create a bank account and be legal. You only pay federal taxes on money distributed to members and on state taxes if in come is over $1mil. However, you can claim tax breaks for capital invested from you to the company in the first year (buying the place).

As far as it being an advantage over just buying it yourself, I don't know. It seems like you would be forced to sell either the property to the next generation or the LLC in order to pass it down which would incur more costs.

I often hear of people starting a trust to purchase land, but have never heard of anyone forming an LLC unless there were intentions of using the property to generate income.

I am not a lawyer either, but I am a landowner and I own the property in my name. The only concern I have as far as liability would be the threat of losing the property if I were ordered by a court to pay damages that I was deemed responsible for. At that point, every valuable asset I own would be vulnerable, though, and not just the property. At least that is how I understand it.

I too am not a lawyer, but I do own property in both my own name and other property in an LLC...

IMO, it really only makes sense to purchase land with an LLC if it is of significant value or if you will be using it to produce income.

In both cases, the idea of using of using an llc is asset protection, but for opposite reasons. With an income producing property you are protecting the rest of your life's assets from a lawsuit pertaining to that property. If the property is of significant value, you are protecting that asset from something happening with your personal life, or from a lawsuit against you personally.

Something to think about is you can transfer property into an llc. In your situation I would probably just purchase it persoanlly, if later it looks like you will rent it out you can then transfer it into a newly created llc.

There are really very little tax advantages on a property of that size and for personal use with an llc, especially when you consider state franchise taxes...imo, your decision should be based on the liability aspect alone

Under $20k? How much land are we talking about here?

wrecking crew is on the right track.

but the other poster who said "You only pay federal taxes on money distributed to members" is wrong (unless it's taxed as a C corp - which is very unlikely for LLCs and potentially disasterous when holding land - in which case the corp pays income tax whether its distributed or not).

The land is 3 acres in Wyoming. Enough to build a house and run a decent little cattle operation.

I kid! (yes, it is 3 acres).

One other issue: I am buying at market rates, but the current owner is under some financial distress, and if things don't work out, could be looking at bankruptcy in the next year or two. Should that influence the LLC decision?

I would finance it, even if you don't have to...the bank will do the due diligence and make sure there are no liens and will assure the current bank is paid in full if applicable, and will insist upon proper paperwork...shouldn't influence your llc decision,imo

Couldnt you get a title company to do that for less than the interest on a $20k loan?

pay the loan off the first month...title company works too, but I think one months interest would be cheaper

I've never been a fan of land trusts.

If it were me, based only on the info presented, I don't know that I would form an LLC for only a $20k property without a substantial risk of liability.

If you rent it out later after a house is built, then an LLC would prevent a slip and fall victim from taking your other assets. Now if there is a 50' waterfall on the property visible from a public trail, I might change my thoughts (especially after a consultation regarding WY trespassing laws).

When you build the house you can transfer title to the land.

Until then, you can most likely insure the property to protect yourself.

It comes down to a cost benefit analysis. For the record, I do not know Wyoming law and this should not be construed as personal legal advice. I encourage you to consult with an attorney licensed to practice in Wyoming. Additionally, you may consult with your estate planning attorney in regard to the best method of ownership for out of state property.

I disagree with the idea of taking out a loan only to cure/find title defects. You are going to have to pay fees for getting the loan set up, and the lender is going to get a mortgagee title policy, which you will be paying for. Your protection comes from the owner's title policy, and in Texas is limited to the amount of the policy. The rates here for title insurance are pretty cheap. No idea about WY.

However, I always suggest that a person have an attorney review the title commitment. I describe the process like buying a vehicle. You can buy an F150 with cloth or leather interiors, with a ton of other options. Exceptions to coverage on a title policy make the difference between what you are getting in terms of coverage from the title company. If there are a bunch of exceptions that shouldn't actually be on the commitment, then you aren't getting the full value of what you are paying for from the title company. Many people (including an attorney friend of mine) who have decided to review the commitment themselves or not have it reviewed at all (including a Harvard law grad), have found out the hard way that saving a dollar on attorneys fees can costs thousands on the back end of a deal.

Best of luck!

^Just curious, minus a family member or family friend, what lawyer do you know that is cheaper than the fees to set up a loan...with a bank loan comes the bank's lawyers

And the bank's lawyers protect....the bank. Not you. I've seen them make mistakes. I've corrected their mistakes. A $500 loan application fee can pay for 2 hours of an attorney's time. Who knows what the closing costs will be. It all depends how complicated the transaction is in regard to attorneys fees. In TX, the basic premium for a title policy for a $20k deal would be $298.

I had a deal a short while back where a large bank with a sky-scraper named after it in downtown Austin requested that the title company change the legal description from what was correct to something that was wrong, on a deal worth over $1 million.

You get what you pay for. Advising someone to rely on the bank is a bad idea.

Plus you are assuming that the loan allows for an immediate payoff. Some don't, or require a penalty to be paid if they do. But I assume you would just take the lender on their word about the loan documents as well, right?

Also, consider this. What if the guy buys it in the manner you suggest. He then pays it off after one month. The property appreciates to be worth $2 million. Even if he had an owner's title policy they would only pay off up to $20000. Well what if the title company and the bank both messed up? Then he has no recourse against anyone for the $1.980 million of appreciation. But the bank got their fee!!

Your first post on this thread was pretty insightful, but the later ones could cause a person severe headaches.

I would agree in a normal scenario using a lender is not necessary and should be avoided; however questions about the seller's financial integrity have been raised, using a lender is a cheap insurance to making sure everything is on the up and up and keeps everybody from cutting corners...that was my only reason for suggesting a lender

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I would agree in a normal scenario using a lender is not necessary and should be avoided; however questions about the seller's financial integrity have been raised, using a lender is a cheap insurance to making sure everything is on the up and up and keeps everybody from cutting corners...that was my only reason for suggesting a lender

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So you are saying that this is a high risk situation and that people shouldn't cut corners, but instead of telling a person to get a title policy and have it reviewed by an attorney, you recommend that they take the added risk of hoping that a lender doesn't mess something up, while implying that the person shouldn't hire their own attorney.

What's worse is that even after a licensed Texas attorney (that just so happens to specialize in real estate law) gives an example of how a lender's attorney wanted to screw up a deal for a client, you come back and make the above statement.

Based on your rationale, I don't see how the country could have gotten into this mortgage crisis we are in. I mean, every one of those people had a lender involved. And half the Americans that took out ARMs probably still don't know how they got into such problems when their ARMs reset, their values declined, and they couldn't pay their mortgage.

Dewrecking Crew - I don't know what business you are in, but I sure hope you are better at that than offering advice on Texags. At least you stipulated that you aren't an attorney.

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Dewrecking Crew - I don't know what business you are in, but I sure hope you are better at that than offering advice on Texags. At least you stipulated that you aren't an attorney.

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Bad bull!

So Todd, did you not read the whole thread, or are you good friends with Dewrecking Crew?

I read the whole thread and I am not friends with him/her. Taking cheap shots like that belong on a schoolyard playground. He/She gave an opinion. You may well be more of an expert, but you certainly lack some professionalism, in my opinion, if you feel you need to resort to insulting someone to exert your superiority in the matter.

*ETA: Sorry for the hijack, OP. Please continue the debate.

[This message has been edited by Todd 02 (edited 11/9/2011 9:04a).]

Come on milkman, this isent the general board. Your way better than petty name calling.

First, I didn't mean for it to be a cheap shot. Sorry if that is the way it came across. Guess I should ban myself from posting on Texags after midnight.

I said it to make sure that the OP doesn't take the info Dewrecking Crew presented in any of his last three posts as good legal advice. It is legally incorrect. In this thread, a person went from offering on point advice/opinions to contradictory advice. Aggiesq's post would make a common reader believe that Dewrecking Crew was accurate in his posts. I even agreed that his first post was insightful, but then things went south.

There are many people that commit what is known as the Unauthorized Practice of Law. I understand that he did not hold himself out to be an attorney and don't believe UPL occurred here. However, if the OP were to rely on the information that Dewrecking Crew presented in his last few posts, the OP might find himself in an unfortunate situation.

I am not commenting on the tax implications, but as far as liability coverage goes. If it is held by you personally; your homeowner's insurance policy will extend to the vacant property. If it is in the LLC it would not. That would extend the liability limits of your home policy to the vacant property without any added cost. It is written into the policy language.

Thanks for all the suggestions and input.

1. I intend to pay cash for the property.
2. The relative who owns the property obtained it from his mother. He used a "quit claim deed" or somesuch, and it was registered with the county tax office. I asked how I would buy from him, he suggested the same thing.
3. There is another outstanding issue. If I'm going to go to a lawyer to make the purchase, maybe I should handle this now as well. The adjacent property was sold a few years ago, and at that time a survey was done. The new survey apparently said that the fence line should be moved 20 feet. So I am told that the new survey mandated a 20 foot "shift" of the property. The problem is that the property that was "lost" was good level property and the property gained was useless graded property (not a good trade). Apparently the fence line has been there for 50 years, if not 100 years. Current owner has not contested anything. Current owner asked a relative who lives in Wyoming, and the relative said to leave it alone, they use "GPS" now, and it's not more accurate. ???? It seems wrong to me that established property boundaries should change from how they were established. Anyone familiar with Wyoming law in how this could be contested? Obviously on a piece of property less than 20k, I don't want to spend an arm and a leg.
4. There is also an easement right-of-way issue with the property. The prior owner had granted an easement on the edge of the property so the landowners up the hill could reach their property. But the existing road is through the middle of the property. It's really not possible to build a road where the easement was granted. The landowners above wanted to improve the road, but only after an official easement had been granted. Current owner (at my advice) did not grant said easement on the theory that cutting a 3 acre property in half destroys its value. I don't think this is a huge issue right now, because one of the landowners has died (the husband), and their desire to improve road and build up there might be dead as well. In fact, I may approach them about buying their property at some point. Access on the existing road has never been denied to them.

Anyway, a lot of issues on one little stinking property, but it is land with deep family roots and that's why I want to buy it. Any further advice would be appreciated. Esp. estimates of how much it might cost to contest the property line.

That quit claim (to the current owner) probably isn't going to help matters. For your transaction, I suggest that you ask for a special warranty deed, at least.

That fence issue is going to depend on WY law. In Texas, a fence being out of place isn't always dispositive, but those cases are very fact specific.

[This message has been edited by RoseRichAg01 (edited 11/9/2011 1:51p).]

Sorry Milkman, didn't mean to tread on your profession, seems I touched a nerve. Just simply stated an opinion on what has worked for me in the past. I have 7 rental properties, of which two, the bank helped me out. I wasn't suggesting all lawyers are worthless, sorry you took offense, was just suggesting using a lender is a "safer" transaction versus cash when dealing with a financially unstable seller and for a $20K property would be cheaper than using a lawyer to do the same due diligence.

Say what you want about the banking crisis, but it had nothing to do with the bank's ability to do due diligence on liens and title issues that may exist. Personally, I blame the Community Reinvestment Act, specifically the legislative changes made to it in 1992 and 1995 along with Clinton's repeal of the Glass-Steagall Act that allowed commercial and investment banks to consolidate, but I digress...

To avoid a complete hijack, back to the OP...first, let me say that I am not a lawyer and anything I say should not be construed as legal advice...

I have two experiences similar to your scenarios that you pose. First, my current residence is on 50 acres that is "land locked", so I am in the same scenario as your neighbors. There are several things that I learned during that purchase, one very important thing I learned from the bank (sorry, couldn't resist) with regards to easements. When I purchased the land, my neighbor had agreed to allow me an easement to use the current road that he had already established. To me, it was the very definition of what an easement was for, didn't think anything of it. However, it was my bank that suggested that I get the easement deeded into my property as that apparently is the only way to assure it is permanent. In other words the neighbor could have potentially revoked the easement at any point in the future. Obviously, he didn't want to deed me the road as my easement, but he agreed to deed me an easement down the fenceline of his property. It would be very difficult to build a road where the easement that was deeded is, but at least I never run the risk of being permanently "land locked" by relying on the kindness of my neighbor. As it stands the neighbor and I just share the road that was in place and I use that as my "unofficial" easement. One thing I also learned, and I have no idea of Wyoming law, and am not a lawyer, but my understanding is an easement can be implied. If your neighbors have been using that road for years and years to access their property, it may be that by law, it is already considered an easement. It may also be true that because they already have an official easement that it is impossible to have an implied easement, I don't know, but if it is already considered an implied easement it probably wouldn't hurt to have them spend the money on the road

With the fence line I don't have a direct correlation, but I once bought some rental property on 3 acres, in the back corner was a 1 acre pond. Turns out that pond resulted in a boundry dispute when we did the survey. The pond was in the corner of three properties. All three landowner's surveys showed the pond as part of their property. My bank handled eveything for me so I'm a little sketchy on the details as it was several years ago, but I think they were able to go to the county tax office and find evidence of historical tax records that the landowner I was purchasing from had been the one paying the taxes on that parcel of land, armed with that evidence the other owners conceded the point. I think it also had something to do with registered versus unregistered surveys, I'm not sure why you would get a survey and not register it but apparently people do. And as I recall the registered surveys pull more weight in a dispute. So you might check that the survey of the property in question is registered. By the way, the bank settled the property dispute for me at no extra charge and I ended up getting the pond. Not sure what a lawyer would charge for that?

I would suggest getting a real estate lawyer to look at everything (which I am not); whatever you do, do not go to a bank that specializes in rural real estate, as they will have never dealt with easements or property line disputes and would just screw everything up and have no idea what actions should be taken to get it straightened out

But going back to the original question, in my novice, non-lawyer, non-cpa, opinion I still don't think you need an llc...I have 7 llc's, one for each rental property, they don't really do anything for me tax wise, it is strictly a liability thing

Thanks again for the advice.

I asked about the line of ownership of the property. The last three owners are relatives of mine. Probably goes back to a generation before that (turn of the century). It's probably unlikely that anyone would contest the title (famous last words).

I'm trying to get a copy of the deed. From other deeds I have seen in the area, it's specified using landmarks, and "two rods from location x..." etc. I'm going to try and get a copy of the contested survey as well.