Flip and Danny break down entity purchases, where you buy the LLC that owns a property instead of the property itself. Buyers use this to avoid property revaluation and higher taxes, but existing liabilities stay with the old entity, and tax authorities often catch and reassess anyway. Work with an attorney and make sure the deal works even if taxes get revalued.
Hey everybody, Flip and Danny here, founders of the Freedom Real Estate Group family of companies. And welcome to another episode of our.
Podcast called Freedom through Passive Income.
That's right. And this episode is called what is an entity purchase and why is it used in negotiation?
Yeah.
And so really this episode is more what an entity purchase is versus an asset purchase.
Right. So everybody knows what an asset purchase is because that's the typical way to buy real estate. That's my microphone thing is just falling on the floor cause I had it in my pocket. So asset purchase is when you actually buy the property. Right. It's a normal title company attorney type closing, where you're writing a contract and you're buying the actual asset and you're going to closing and the asset is going to transfer.
Right.
An entity purchase is where the asset is held by an entity, which is typical as well. But instead of us buying the asset like 1 2, 3 Main street, we're gonna buy 123 LLC. We're gonna buy the entity that holds or owns the asset and we're doing that strategically in negotiations. And if we think there's a huge hike that there's going to be, hey, you bought it at 1 million, I'm buying at 3 million, my taxes are going to blow up and I don't want my taxes to blow up. So I want to try my best not to have this reflected in the normal way an asset purchase is reflected. Where they know the asset transfer, they're looking at the new sales price, they're raising the taxes because the schools want their money. And I get it, schools are important. But cheese. So that's why an entity purchase is used now, it's not always going to work.
Right. Because the schools, like you just mentioned, they are getting very wise to this maneuver.
Yes.
And they're finding ways to still find out that this happened. Because like you said, one of the things with those property taxes, a lot of that money goes to the schools and they are doing everything they can to get all of that value and all that money back. Because I mean there's properties that, that will increase in value and you they're trying to raise taxes on it and the schools are out there making sure, hey, this one just sold for twice the price.
That's right.
So yeah. So again they're getting pretty sneaky about it.
And they're probably going, woo hoo, learned a new way to find more money.
That's right. Exactly right.
So if you are going to do something like this, you're going to want to Work with an attorney that knows how to do it. There's some moving parts and there's some things that you want to avoid, pitfalls, if you will. So work with an attorney. The attorney is going to create an entity, a new entity. This is the pitfall that you want to avoid because if you buy the old entity. So let's just Say Flip has 123 Main Street LLC. And I decided I wanted his entity, not an asset purchase because I was going to save some money. But what if Flip was a bad boy and he has pending lawsuits? He didn't pay bills, he's got just issues going on at the property. His LLC is where all of that follows, right? I don't want all the risk or all the trouble or the crap or the liabilities that he created. So I'm gonna want flip, Mr. Bad Boy, to quitclaim that asset into a new entity that's fresh and clean and doesn't carry all the risk that his LLC potentially did. I don't know if Flip was a bad boy. He's actually pretty nice. Yes, we. But I don't want the risk, so I'm gonna ask him to put it in this new entity. So this new is created by Flip or I pay the attorney that. And I say create it for Flip because I want him to put his. His. The asset into this new LLC and then I want to buy the llc and that's how that transaction essentially is going to work. But attorneys, they know how to do all of this stuff. Just say, hey, have you done an entity purchase before? And if yes, can you handle all of this for me? Here's what I want to do. Here's the loi. Tell me what to do next. And they're going to take you along the path in order to close the deal with an entity purchase as opposed to asset. Now, I dropped my mic thing again. Let me just put it right up. Really nice. Hopefully, like this is still recording. Look, it's blinking. What was I going to say? Oh, just when you're unwriting a deal and you're going to do an entity purchase instead of an asset purchase, don't count on the fact that the taxes aren't going to be there. Because what Flip said is right. They could see your entity purchase and they're going to say, hey, this property was. Or this entity was purchased for this. Whatever it is that they do, they slide in and just revalue the property and then suddenly your taxes go up anyway and you spent all this time and energy and cost in order to do an entity purchase. So make it. Make sure it's worth it, but make sure that the deal is still going to be a deal even if the taxes go up. Otherwise it's a bad deal.
Just otherwise. Exactly. Because that's something that's out of your control.
Yes.
Never, never do a deal on when you're hoping that something that's out of your control stays the way it is or whatever.
Yeah, that's.
That's not good.
Yeah. Absolutely right. No. Yep.
Well, we hope that you enjoyed this episode. Make sure you're going on over to our website, freedomcapitalinvestments.com to join our investor club. But make sure you're hitting the like.
Button if you don't think Flip's a bad boy. You think he's a good boy because he is.
Oh, we're going to get zero likes today. All right, well, that's it for this.
I'm just trying to think of new ways to ask for likes.
But make sure you're heading over to Facebook, LinkedIn to the groups out there. Get your questions into the team there and hitting the subscribe button on YouTube if you're watching on YouTube. But we like to end all of our episodes with invest smart, Live Happy. Bye, everybody. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate, financial or business professional for individualized advice. Opinions and information on this show are not guaranteed. All investment strategies have the potential for profit or loss.
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