I think it's time to revisit this question.

Many people are thinking about transferring their properties to an LLC because of the new tax law, but the fact is that the pass-thru provisions apply equally to LLCs and sole proprietorships, and a single member LLC provides no protection for anything the LLC owner personally does that causes damage.

I met with a financial planner last November and he was recommending transferring my 8 rentals now owned personally into one or more LLCs. Most of the properties have a FNMA 30 year mortgage at 4.125%, a rate which I can no longer get, so I immediately asked this expert about the Due-On-Sale clauses. His response was that it was not a problem; that he advises clients about this all the time. He conceded that it is a risk, but viewed it as only a small one. I told him that it might be a small risk, but the consequences would be huge if it happened. He offered he had an attorney working with him who could advise me about that. From the office we called the attorney who said it was permissible, and in fact when she does title opinions, etc. she passes it without any concern. She even suggested there were rules and statutes that sanctioned the practice. I knew there were provisions pertaining to my principal residence so I asked her to send me anything she had that applied similarly to investments properties. She never sent me anything.

I called my mortgage servicer for three of the properties and asked about how to transfer my properties to an LLC. She immediately stated it was not permitted. I asked her to check with her supervisor who also stated without hesitation that it is not permitted. They have no discretion because it is a FNMA rule. Period. Done. So if I were to transfer, I would have to hide it from the lender. That does not seem like a good long-term plan. I prefer sleeping at night.

How big is the risk now?

One of my properties has a local bank credit line on it. It is up for renewal so I made an appointment to review our options. After our business discussion was over, I asked him about Due On Sale clauses. My thought was that since 1980 we have been in a falling interest rate environmnent. In that circumstance, it makes no sense for a lender to call a performing loan for a Due On Sale violation because the borrower would just refinance at a lower rate and the bank would then have to re-lend their proceeds at a lower interest rate as well. However, the situation is completely different in a rising interest rate environmnent. The bank can again force the borrower to refinance, either with them or in the market, and then re-lend their proceeds at a higher interest rate. Meanwhile the borrower now is paying higher interest than before the loan was called. I don't see any reason why the bank would not exercise its option to call these loans. And I expect interest rates to be about 1% higher a year from now so the incentive will only be increasing. Given the bank's incentive, I also don't think the bank would allow the transfer to be reversed and forgiven.

My bank officer agreed with my analysis and said his bank was beginning to take a closer look at these. He likened it to the 80's when banks didn't want to do residential second mortgages, but small lenders were making serious money doing them. The banks then changed the name to HELOC and got into them in a big way. He thought that few banks are actively enforcing the Due On Sale now, but once they see the benefits as rates rise, they will become common and aggressively pursued.

Does anyone have any direct experience with Due On Sale and LLC transfers? I'm not really interested in hearing from everyone who did a transfer and didn't get caught. Instead, I especially want to know the experience on anyone who tried to obtain permission for a transfer, or whose loan was called but was able to resolve it without refinancing. Thanks, Rick

RAISING HAND RIGHT HERE! We transferred our one remaining property with a mortgage to an LLC along with a few paid-off units.

Few months later, the mortgage was SOLD from long-time lender Citimortgage to "Mr. Cooper" loan servicer. All these guys want to DO is re-finance old loans, because the loans are no longer all interest (our principal payment is now more than our interest payment.) They contact me weekly by mail, and more often by email, and even phone. ARGH.

They didn't notice the name change though until INSURANCE time, when they said they needed proof of insurance (we don't escrow.) So we send them the insurance proof (not even thinking about the change of owner) and uh-oh. They immediately started writing to us about it.

When we first started out we had an LLC but no one would give us a mortgage under the LLC. Your experience and WMH's in trying to transfer the property is a prohibited action.

Our taxes are filed under the LLC and the IRS accepts that so we receive the tax benefits of an LLC but do not have the liability protection. We pay a lot of money for our property insurance with $3 mil in liability/ property and have an huge umbrella policy on top of that and hope we will never ever have to use it.

This past fall I looked into transferring the title to the LLC but I only looked at lenders that specialize in residential investment properties. After running the numbers coupled with the balloon and the sleaze factor I sensed from most of them I decided against it.

So, I'm curious why you want to do it at all. I mean, you state it best right in your own post:

"Many people are thinking about transferring their properties to an LLC because of the new tax law, but the fact is that the pass-thru provisions apply equally to LLCs and sole proprietorships, and a single member LLC provides no protection for anything the LLC owner personally does that causes damage."

So, after realizing that -- why do you then want to do it anyhow?

- John...

I agree that the risk of your loan being called is there and it is real ...no matter what anyone standing in front of a room full of folks at a seminar may tell you. I for one would not want to be the test case for it if lenders start enforcing this.

Thanks for the responses.

John, I didn't really want to do it, but I was confused by the financial planning expert and their lawyer (even though I am one, too, but I don't specialize in estate planning). I wanted to be sure my thinking was right, so this forum was the place to go.

I am planning a return appointment with the financial planner and I will confront him with this so he doesn't lead anyone down the wrong path about this.

here is what most Pennsylvania mortgages state:

18. Transfer of the Property or a Beneficial Interest in Borrower. As used in this Section 18, "Interest in the Property" means any legal or beneficial interest in the Property, including, but not limited to, those beneficial interests transferred in a bond for deed, contract for

deed, installment sales contract or escrow agreement, the intent of which is the transfer of title by Borrower at a future date to a purchaser.

If all or any part of the Property or any Interest in the Property is sold or transferred (or if Borrower is not a natural person and a beneficial interest in Borrower is sold or transferred) without Lender's prior written consent, Lender may require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if such exercise is prohibited by Applicable Law.

If Lender exercises this option, Lender shall give Borrower notice of acceleration. The notice shall provide a period of not less than 30 days from the date the notice is given in accordance with Section 15 within which Borrower must pay all sums secured by this Security Instrument. If Borrower fails to pay these sums prior to the expiration of this period, Lender may invoke any remedies permitted by this Security Instrument without further notice or demand on