The Biden administration has proposed several changes to the tax code that threaten commercial property values.
We’ve been writing to you on this topic for months, but now the debate is taking shape in both houses of Congress, which means tax hikes will be front page news for months to come. That being the case, this is a good time to evaluate your current strategy and ownership structure and take any preemptive steps that will position you to respond quickly and efficiently if changes to the tax code prompt action on your part.
Title to most commercial properties is held by Limited Liability Companies, or LLC’s. It is a time-tested ownership structure that allows investors to pool resources, acquire and manage property and eventually dispose of that property in a fair and orderly fashion. Sometimes the LLC is made up of just family members. Other times it includes a mix of family and business partners or completely unrelated parties assembled by an individual for the purposes of acquiring property. At the outset, the members of an LLC sign on because they see it as in their best interests to do so at the time.
Then things change. Time passes. People get older. Life circumstances take each member in different directions. Unfortunately, most LLC operating agreements are not modified to accommodate those changes in circumstances and when one or more members decide they want out, things can become a tangled mess. Often, we find that each member of an LLC wants to exit the investment through a different door. One may want to cash out, another may want to exchange into a property on their own, while others want to maintain the status quo. Depending on how decisions are made pursuant to the operating agreement, accommodating every member’s interests can difficult at best.
One very common strategy for LLC’s that may soon be looking to dispose of property is to convert the LLC to a Tenants In Common (TIC) vesting. This allows each member of the LLC to go in their own preferred direction at disposition. As a tenant in common, each member can either cash out or exchange their interests into other property without impacting the other members. However, a good CPA will tell you that the “drop” to a TIC should be in place for at least one tax year to withstand an IRS challenge. Some even recommend two to three years lead time just to be safe.
So, if you own property as an LLC or in a partnership, it may not be as easy as you thought to dispose of it on short notice should market circumstances call for that action. We recommend that you consult with your CPA and estate planning professionals to update your current investment strategy and make any appropriate structural changes to your ownership entity that will give you maximum flexibility should you decide to sell.