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Setting the Record Straight on LLCs

Listen to Rick’s column here: Download setting_the_record_straight.mp3

When I read Bill Napoli’s editorial in the October 26 Rapid City Weekly News, I felt compelled to respond. My concern is not with the merits or problems of Amendment D, but with correcting his egregious factual errors regarding the use of LLCs and corporations as they pertain to the ownership of residential property under the current property tax system.

Mr. Napoli listed seven negative consequences of putting your personal residence in an LLC. None of them has anything to do with Amendment D. Additionally, none of them is true. He contends:

1. You would not qualify for the federal home mortgage interest deduction.

2. You would lose your 30% “owner occupied” property tax reduction.

3. You would lose your residential mil levy rate and end up with the higher commercial rate.

4. Your property would be rezoned from residential to commercial.

5. Properties currently owned by LLCs and corporations represent an extreme method of tax evasion by circumventing the current property tax system and are not paying their fair share.

6. Putting your property in an LLC would almost double your taxes.

7. The average commercial property sells only twice every 80 years (“in a lifetime”).

Let’s take a look at the facts:

1. According to Paul Thorstenson, an accountant with Ketel Thorstenson, a single-member LLC is able to fully deduct mortgage interest. In addition, there is nothing in the tax code that would indicate a personal residence placed in a two-member LLC will lose its mortgage interest deduction.

2. According to Rob Miller, Pennington County Director of Equalization, an owner-occupied house placed in an LLC will not lose its “owner occupied” property tax reduction.

3. Also according to Mr. Miller, a house owned by an LLC will not be taxed at the commercial or non-ag mil levy rate.

4. According to Dan Jennissen, Planning Director for Pennington County, “Ownership has no bearing on what the property is zoned.” Putting a residential property in an LLC will have no effect on its zoning.

5. According to Mr. Miller, properties currently owned by LLCs and corporations are taxed based on zoning, value, and use. The ownership of a property has absolutely nothing to do with the property taxes paid. In fact, commercial property, whether owned by an individual, LLC, or corporation, is taxed at the highest property tax rates.

6. Obviously, since all the above are false, putting your property in an LLC will not change your property tax bill one iota.

7. I don’t know where Mr. Napoli got his information that commercial properties are sold only “twice in a lifetime.” Having sold commercial real estate in Rapid City for over 30 years, I can assure you that very few commercial properties sell that infrequently. As an example, the old First Federal Building, now Turnac Towers, has sold four times in 40 years.

There is one caveat to keep in mind if you decide to put your personal residence in a LLC. Make sure it is a single-member LLC so you will retain your Section 121 capital gains exclusion when you sell the house. “If the LLC is owned by one individual, the LLC entity is ignored by the IRS. If there are two or more members in the LLC, the exclusion will be lost,” says Thorstenson.

I also want to emphasize again the importance of consulting attorneys and accountants before you put either residential or commercial properties in LLCs. Decisions such as these need to be based on what is best in your particular situation. They also need to be based on accurate information. That is why I felt the need to set the record straight.

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One Response to Setting the Record Straight on LLCs

  1. Bob Biernbaum October 31, 2006 at 4:06 pm #

    Additionally, because the single member LLC is ignored by the IRS, there is no need to file a separate return.