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Security deposits on real estate LLC - recourse debt?
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Mike20878
Feb 13, 2013, 12:16:46 PM2/13/13
to
A colleague insists that security deposits in a real estate LLC are recourse debt. She says the managing member has a fiduciary responsibility to safeguard the deposits of tenants. I have never treated them that way. Thoughts?
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<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2011) - All rights reserved. >>
<< ------------------------------------------------------- >>
Stuart A. Bronstein
Feb 13, 2013, 1:05:57 PM2/13/13
to
Mike20878 <mro...@gmail.com> wrote:
> A colleague insists that security deposits in a real estate LLC
> are recourse debt. She says the managing member has a fiduciary
> responsibility to safeguard the deposits of tenants. I have
> never treated them that way. Thoughts?
I don't understand the situation. Sounds like you're saying that an
> A colleague insists that security deposits in a real estate LLC
> are recourse debt. She says the managing member has a fiduciary
> responsibility to safeguard the deposits of tenants. I have
> never treated them that way. Thoughts?
LLC owns a building, rents it out and takes a security deposit.
If so, the members don't make a contribution toward the deposit, so I
don't see how it matters to them whether or not its recourse debt.
But even if the LLC manager has the duty you say, then the debt might
be recourse as to her but not to the other members who do not have
personal liability.
___
Stu
http://DownToEarthLawyer.com
Mike20878
Feb 13, 2013, 6:46:07 PM2/13/13
to
On Wednesday, February 13, 2013 1:05:57 PM UTC-5, Stuart A. Bronstein wrote:
> Mike20878 <> wrote:
>
>
>
> > A colleague insists that security deposits in a real estate LLC
>
> > are recourse debt. She says the managing member has a fiduciary
>
> > responsibility to safeguard the deposits of tenants. I have
>
> > never treated them that way. Thoughts?
>
>
>
> I don't understand the situation. Sounds like you're saying that an
>
> LLC owns a building, rents it out and takes a security deposit.
>
>
>
> If so, the members don't make a contribution toward the deposit, so I
>
> don't see how it matters to them whether or not its recourse debt.
>
>
>
> But even if the LLC manager has the duty you say, then the debt might
>
> be recourse as to her but not to the other members who do not have
>
> personal liability.
>
>
>
I just thought that no member, managing or otherwise, has personal liability in a LLC. I've always treated it as nonrecourse.
>
>
>
> > A colleague insists that security deposits in a real estate LLC
>
> > are recourse debt. She says the managing member has a fiduciary
>
> > responsibility to safeguard the deposits of tenants. I have
>
> > never treated them that way. Thoughts?
>
>
>
> I don't understand the situation. Sounds like you're saying that an
>
> LLC owns a building, rents it out and takes a security deposit.
>
>
>
> If so, the members don't make a contribution toward the deposit, so I
>
> don't see how it matters to them whether or not its recourse debt.
>
>
>
> But even if the LLC manager has the duty you say, then the debt might
>
> be recourse as to her but not to the other members who do not have
>
> personal liability.
>
>
>
Pico Rico
Feb 13, 2013, 8:55:18 PM2/13/13
to
"Mike20878" <mro...@gmail.com> wrote in message
news:12053e05-31e6-4635...@googlegroups.com...
> On Wednesday, February 13, 2013 1:05:57 PM UTC-5, Stuart A. Bronstein
> wrote:
>> Mike20878 <> wrote:
>>
>>
>>
>> > A colleague insists that security deposits in a real estate LLC
>>
>> > are recourse debt. She says the managing member has a fiduciary
>>
>> > responsibility to safeguard the deposits of tenants. I have
>>
>> > never treated them that way. Thoughts?
>>
>>
>>
>> I don't understand the situation. Sounds like you're saying that an
>>
>> LLC owns a building, rents it out and takes a security deposit.
>>
>>
>>
>> If so, the members don't make a contribution toward the deposit, so I
>>
>> don't see how it matters to them whether or not its recourse debt.
>>
>>
>>
>> But even if the LLC manager has the duty you say, then the debt might
>>
>> be recourse as to her but not to the other members who do not have
>>
>> personal liability.
>>
>>
>>
>
> I just thought that no member, managing or otherwise, has personal
> liability in a LLC. I've always treated it as nonrecourse.
>
Where does the issue of recourse vs. nonrecourse debt come up? On a tax
> wrote:
>> Mike20878 <> wrote:
>>
>>
>>
>> > A colleague insists that security deposits in a real estate LLC
>>
>> > are recourse debt. She says the managing member has a fiduciary
>>
>> > responsibility to safeguard the deposits of tenants. I have
>>
>> > never treated them that way. Thoughts?
>>
>>
>>
>> I don't understand the situation. Sounds like you're saying that an
>>
>> LLC owns a building, rents it out and takes a security deposit.
>>
>>
>>
>> If so, the members don't make a contribution toward the deposit, so I
>>
>> don't see how it matters to them whether or not its recourse debt.
>>
>>
>>
>> But even if the LLC manager has the duty you say, then the debt might
>>
>> be recourse as to her but not to the other members who do not have
>>
>> personal liability.
>>
>>
>>
>
> I just thought that no member, managing or otherwise, has personal
> liability in a LLC. I've always treated it as nonrecourse.
>
form?
Stuart A. Bronstein
Feb 14, 2013, 11:38:04 AM2/14/13
to
Mike20878 <mro...@gmail.com> wrote:
> Stuart A. Bronstein wrote:
>> Mike20878 <> wrote:
>>
>> > A colleague insists that security deposits in a real estate
>> > LLC are recourse debt. She says the managing member has a
>> > fiduciary responsibility to safeguard the deposits of tenants.
>> > I have never treated them that way. Thoughts?
>>
>> I don't understand the situation. Sounds like you're saying
>> that an LLC owns a building, rents it out and takes a security
>> deposit.
>>
> Stuart A. Bronstein wrote:
>> Mike20878 <> wrote:
>>
>> > A colleague insists that security deposits in a real estate
>> > LLC are recourse debt. She says the managing member has a
>> > fiduciary responsibility to safeguard the deposits of tenants.
>> > I have never treated them that way. Thoughts?
>>
>> I don't understand the situation. Sounds like you're saying
>> that an LLC owns a building, rents it out and takes a security
>> deposit.
>>
>> don't see how it matters to them whether or not its recourse
>> debt.
>
>> debt.
>
> I just thought that no member, managing or otherwise, has
> personal liability in a LLC. I've always treated it as
> nonrecourse.
That's normally true though there are exceptions. But unless you
> personal liability in a LLC. I've always treated it as
> nonrecourse.
give more information, there is no way to know what you are talking
about, or to give you any kind of reasonable response.
___
Stu
http://DownToEarthLawyer.com
Alan
Feb 15, 2013, 3:22:29 PM2/15/13
to
On 2/13/13 10:16 AM, Mike20878 wrote:
> A colleague insists that security deposits in a real estate LLC are recourse debt. She says the managing member has a fiduciary responsibility to safeguard the deposits of tenants. I have never treated them that way. Thoughts?
>
You may want to check the Real Estate Law for the jurisdiction.
> A colleague insists that security deposits in a real estate LLC are recourse debt. She says the managing member has a fiduciary responsibility to safeguard the deposits of tenants. I have never treated them that way. Thoughts?
>
Typically, when you rent property (residential, commercial, business)
the law requires that any security deposit be deposited into a trust or
escrow account. As such, the funds are owned by the tenant, not the
landlord. There is no loan!
--
Alan
http://taxtopics.net
remove ps
Feb 16, 2013, 10:17:31 PM2/16/13
to
Pico Rico wrote:
>
> "Mike20878" <mro...@gmail.com> wrote in message
> news:12053e05-31e6-4635...@googlegroups.com...
> > On Wednesday, February 13, 2013 1:05:57 PM UTC-5, Stuart A.
> > Bronstein wrote:
> >>Mike20878 <> wrote:
> > >
> > >
> > >
> >>> A colleague insists that security deposits in a real estate LLC
> > >
> >>> are recourse debt. She says the managing member has a fiduciary
> > >
> >>> responsibility to safeguard the deposits of tenants. I have
> > >
> >>> never treated them that way. Thoughts?
> > >
> > >
> > >
> > > I don't understand the situation. Sounds like you're saying that
> > > an
> > >
> > > LLC owns a building, rents it out and takes a security deposit.
> > >
> > >
> > >
> > > If so, the members don't make a contribution toward the deposit,
> > > so I
> > >
> > > don't see how it matters to them whether or not its recourse debt.
> > >
> > >
> > >
> > > But even if the LLC manager has the duty you say, then the debt
> > > might
> > >
> > > be recourse as to her but not to the other members who do not have
> > >
> > > personal liability.
> > >
> > >
> > >
> >
> > I just thought that no member, managing or otherwise, has personal
> > liability in a LLC. I've always treated it as nonrecourse.
> >
>
> Where does the issue of recourse vs. nonrecourse debt come up? On a
> tax form?
It can show up on the 1099-C. When you default on your loan and the
>
> "Mike20878" <mro...@gmail.com> wrote in message
> news:12053e05-31e6-4635...@googlegroups.com...
> > On Wednesday, February 13, 2013 1:05:57 PM UTC-5, Stuart A.
> > Bronstein wrote:
> >>Mike20878 <> wrote:
> > >
> > >
> > >
> >>> A colleague insists that security deposits in a real estate LLC
> > >
> >>> are recourse debt. She says the managing member has a fiduciary
> > >
> >>> responsibility to safeguard the deposits of tenants. I have
> > >
> >>> never treated them that way. Thoughts?
> > >
> > >
> > >
> > > I don't understand the situation. Sounds like you're saying that
> > > an
> > >
> > > LLC owns a building, rents it out and takes a security deposit.
> > >
> > >
> > >
> > > If so, the members don't make a contribution toward the deposit,
> > > so I
> > >
> > > don't see how it matters to them whether or not its recourse debt.
> > >
> > >
> > >
> > > But even if the LLC manager has the duty you say, then the debt
> > > might
> > >
> > > be recourse as to her but not to the other members who do not have
> > >
> > > personal liability.
> > >
> > >
> > >
> >
> > I just thought that no member, managing or otherwise, has personal
> > liability in a LLC. I've always treated it as nonrecourse.
> >
>
> Where does the issue of recourse vs. nonrecourse debt come up? On a
> tax form?
lender takes back the house, if the loan was recourse then they issue a
1099-C for the forgiven debt.
Mike20878
Feb 18, 2013, 6:27:56 PM2/18/13
to
On Wednesday, February 13, 2013 8:55:18 PM UTC-5, Pico Rico wrote:
> Where does the issue of recourse vs. nonrecourse debt come up? On a tax
>
> form?
1065 partnership return for an LLC, schedule K-1, allocation of liabilities. Recourse debt (where a LLC member is on the hook for the "debt") gives a member basis to take losses whereas nonrecourse (where no one is at risk personally) does not.
> Where does the issue of recourse vs. nonrecourse debt come up? On a tax
>
> form?
None of these entities is putting the deposits into an escrow account. I've never seen a client do that. I don't know if that's required for a commercial lease. Either that or just no one ever does it.
Does anyone here do partnership returns? I'm not talking about recourse in the sense of a mortgage.
I asked a real estate partner at my old firm and it is her belief that the managing member of the LLC would not be personally liable. The law and tax treatment are different in her opinion.
Pico Rico
Feb 18, 2013, 7:40:55 PM2/18/13
to
news:ee197806-8fb7-4991...@googlegroups.com...
deposit is not held in trust, need not be held separate from the LL funds,
and no interest is to be owed to the tenant's security deposit. It is a LL
obligation, just as any other bill is. So, I would say non-recourse to a
corporation shareholder.
> On Wednesday, February 13, 2013 8:55:18 PM UTC-5, Pico Rico wrote:
>> Where does the issue of recourse vs. nonrecourse debt come up? On a tax
>>
>> form?
>
> 1065 partnership return for an LLC, schedule K-1, allocation of
> liabilities. Recourse debt (where a LLC member is on the hook for the
> "debt") gives a member basis to take losses whereas nonrecourse (where no
> one is at risk personally) does not.
>
> None of these entities is putting the deposits into an escrow account.
> I've never seen a client do that. I don't know if that's required for a
> commercial lease. Either that or just no one ever does it.
>
> Does anyone here do partnership returns? I'm not talking about recourse
> in the sense of a mortgage.
>
> I asked a real estate partner at my old firm and it is her belief that the
> managing member of the LLC would not be personally liable. The law and
> tax treatment are different in her opinion.
the many commercial leases I have seen specifically state that the security
>> Where does the issue of recourse vs. nonrecourse debt come up? On a tax
>>
>> form?
>
> 1065 partnership return for an LLC, schedule K-1, allocation of
> liabilities. Recourse debt (where a LLC member is on the hook for the
> "debt") gives a member basis to take losses whereas nonrecourse (where no
> one is at risk personally) does not.
>
> None of these entities is putting the deposits into an escrow account.
> I've never seen a client do that. I don't know if that's required for a
> commercial lease. Either that or just no one ever does it.
>
> Does anyone here do partnership returns? I'm not talking about recourse
> in the sense of a mortgage.
>
> I asked a real estate partner at my old firm and it is her belief that the
> managing member of the LLC would not be personally liable. The law and
> tax treatment are different in her opinion.
deposit is not held in trust, need not be held separate from the LL funds,
and no interest is to be owed to the tenant's security deposit. It is a LL
obligation, just as any other bill is. So, I would say non-recourse to a
corporation shareholder.
Stuart A. Bronstein
Feb 19, 2013, 10:02:45 AM2/19/13
to
Mike20878 <mro...@gmail.com> wrote:
> I asked a real estate partner at my old firm and it is her
> belief that the managing member of the LLC would not be
> personally liable. The law and tax treatment are different in
> her opinion.
I'd tend to agree with the partner. On the other hand there might
> I asked a real estate partner at my old firm and it is her
> belief that the managing member of the LLC would not be
> personally liable. The law and tax treatment are different in
> her opinion.
be something in the lease that could impose personal liability,
such as a personal guarantee.
But you haven't given enough details to even know what in the world
you are talking about, so it's impossible to give you meaningful
advice.
For example, is the LLC the landlord or the tenant? And why or how
would there be a loss that this applies to?
Why would this be an issue anyway, since the concept of money being
at risk normally applies to borrowed money? If the landlord takes
a deposit, it is not normally taxable at that time because it
really belongs to the tenant. There is no money at risk or not,
LLC or not.
--
Stu
http://DownToEarthLawyer.com
Mike20878
Feb 19, 2013, 12:39:10 PM2/19/13
to
On Tuesday, February 19, 2013 10:02:45 AM UTC-5, Stuart A. Bronstein wrote:
No loss, but proper presentation/reporting is still important. I had a disagreement with a colleague who was steadfast in her belief that the held deposits are recourse to the managing member.
> Mike20878 <mxx...@gmail.com> wrote:
>
>
>
> I'd tend to agree with the partner. On the other hand there might
>
> be something in the lease that could impose personal liability,
>
> such as a personal guarantee.
>
>
>
> But you haven't given enough details to even know what in the world
>
> you are talking about, so it's impossible to give you meaningful
>
> advice.
>
>
>
> For example, is the LLC the landlord or the tenant? And why or how
>
> would there be a loss that this applies to?
>
>
>
> Why would this be an issue anyway, since the concept of money being
>
> at risk normally applies to borrowed money? If the landlord takes
>
> a deposit, it is not normally taxable at that time because it
>
> really belongs to the tenant. There is no money at risk or not,
>
> LLC or not.
>
Sorry, I thought it was a given that the LLC is the landlord. Money being at risk is not just applied to borrowed money. This is a liability of the LLC and the liabilities on the balance sheet should tie out to the total allocated liabilities on schedules K-1.
>
>
>
> I'd tend to agree with the partner. On the other hand there might
>
> be something in the lease that could impose personal liability,
>
> such as a personal guarantee.
>
>
>
> But you haven't given enough details to even know what in the world
>
> you are talking about, so it's impossible to give you meaningful
>
> advice.
>
>
>
> For example, is the LLC the landlord or the tenant? And why or how
>
> would there be a loss that this applies to?
>
>
>
> Why would this be an issue anyway, since the concept of money being
>
> at risk normally applies to borrowed money? If the landlord takes
>
> a deposit, it is not normally taxable at that time because it
>
> really belongs to the tenant. There is no money at risk or not,
>
> LLC or not.
>
No loss, but proper presentation/reporting is still important. I had a disagreement with a colleague who was steadfast in her belief that the held deposits are recourse to the managing member.
Stuart A. Bronstein
Feb 19, 2013, 1:46:16 PM2/19/13
to
Mike20878 <mro...@gmail.com> wrote:
> Sorry, I thought it was a given that the LLC is the landlord.
> Money being at risk is not just applied to borrowed money. This
> is a liability of the LLC and the liabilities on the balance
> sheet should tie out to the total allocated liabilities on
> schedules K-1.
>
> No loss, but proper presentation/reporting is still important.
> I had a disagreement with a colleague who was steadfast in her
> belief that the held deposits are recourse to the managing
> member.
As someone else noted earlier, whether the employee of a
> Sorry, I thought it was a given that the LLC is the landlord.
> Money being at risk is not just applied to borrowed money. This
> is a liability of the LLC and the liabilities on the balance
> sheet should tie out to the total allocated liabilities on
> schedules K-1.
>
> No loss, but proper presentation/reporting is still important.
> I had a disagreement with a colleague who was steadfast in her
> belief that the held deposits are recourse to the managing
> member.
corporation landlord may be personally liable for return of a
security deposit will depend on the laws of the state where the
property is located. In some states the landlord is required to
put a security deposit into a trust fund. And anyone personally
responsible for holding that trust fund can be held liable for not
returning it.
But that has nothing to do with the LLC, and only to do with the
particular person's job description.
___
Stu
http://DownToEarthLawyer.com
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