Security deposits on real estate LLC - recourse debt?

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.

___ Stu

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?

That's normally true though there are exceptions. But unless you give more information, there is no way to know what you are talking about, or to give you any kind of reasonable response.

___ Stu

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. 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!

It can show up on the 1099-C. When you default on your loan and the lender takes back the house, if the loan was recourse then they issue a

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 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.

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.

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 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

I treat security deposits as recourse debt allocable to the general partner only.