.svg)
Many real estate investors, big and small, chose to own their properties as limited liability companies (LLCs) rather than under their personal name. There can be significant advantages to doing this from tax savings to lowering your personal liability. But, there are also some possible drawbacks. We’ll break them down below.
An LLC is a business structure in which the owners or members are not personally liable for the company’s debts or liabilities. It’s a popular option among real estate investors because it’s a low-cost hybrid between a corporation and a partnership or sole proprietorship.
If you own property under your personal name and get sued, then your personal assets could be at stake. By holding property as an LLC, only the assets of the LLC are at stake. For many investors, this often means just the rental property and that their personal bank accounts would be shielded from most lawsuits.
Real estate investors who own multiple rentals often choose to set up separate LLCs for each property. By doing this, investors can insulate each property and it’s assets from possible issues. Meaning, if someone files a lawsuit against one of your LLCs, it won’t affect the assets tied to the other “insulated” properties.
Additionally, creating separate LLCs can help distinguish business from personal expenses–-as well as isolate expenses by each property. This will make it much easier on you or your accountant when it comes time to file taxes.
Unlike a corporation, a limited liability company is a “pass through” tax entity. Corporations are subject to “double taxation,” first as the business and a second time on the owner’s paycheck. But, an LLC allows you to flow the earnings through to your personal income and skip paying taxes on the entity, so you don’t have to pay taxes twice.
The most common mechanism for transferring title from an individual to and LLC is a quit claim deed. Depending on where you live, you can download a template and file it with your local county recorder’s office for a nominal fee (usually around $100). But, there are some states (such as Georgia) where preparing a deed is considered the practice of law, so it’s important to do your due diligence on local and state nuances. If you’re unsure, it’s a good idea to enlist your attorney or title company to help with preparing the quit claim deed.
If you buy a property and transfer ownership to your LLC, you might have some issues when you go to refinance. Fannie and Freddie will only buy or guarantee loans that are issued to a person, not a business entity. This means, residential lenders, who offer the most attractive rates won’t refinance a property that is held by an LLC.
You have a couple of options in this situation, you can choose to refinance with a commercial or portfolio lender, who have shorter term lengths and less attractive rates. Or, you can quit claim the property back into your name to refinance the loan. But, this can present some additional headaches.
Depending on the municipality, transferring the title back and forth between your business entity and name could incur transfer taxes. These taxes can be upwards of several thousand dollars and add significantly to your closing costs.
Unless you choose to utilize a 1031 exchange, you could get hit with state and federal capital gains taxes when you go to sell your rental property. If you’ve rented the property out for a number of years and it’s held by an LLC, it’s clearly been utilized as a rental/income property.
Many states offer property tax incentives such as the homestead exemption, which shield a portion of a home's value from property taxes. These exemptions are only available to people, not business entities such as an LLC.
Another potential problem with buying a rental property in your personal name and then transferring title to an LLC is that it could invalidate your mortgage and/or your owner’s title insurance policy.
Transferring property from your name to an LLC does not transfer your mortgage. In fact, many mortgages have a “due on sale clause,” which means if you change ownership without letting them know, the bank could make you pay the full mortgage amount on the spot. So, it’s a good idea to contact your lender before making any changes to the title.
Similarly, if you purchase an owner’s policy under your personal name, coverage can only extend to an LLC if it’s wholly owned by you. Meaning, if you are one of three owners of the LLC you transfer ownership to, you could invalidate the original owner’s policy. In this situation, you’d need to contact your title insurance provider and have them add an endorsement naming an additional insured under your existing policy.
As with many investment decisions, choosing to transfer the title on a rental property from your name to an LLC can have some unintended consequences. That’s why it’s best to enlist help from your attorney, financial advisor, and preferred title company before making any big moves.
For more title industry insights, continue exploring the Spruce Blog or check out our FAQs.
Sed ut perspiciatis unde omnis iste natus error sit vol uptatem accusantium doloremque laudantium, total merem aperiam, eaque ipsa quae ab illo inventore veritatis et quasi architecto beatae nugit
Sed ut perspiciatis unde omnis iste natus error sit voluptatem accusantium doloremque laudantium, totam rem aperiam, ipsa quae ab illo inventore veritatis et quasi architecto beatae vitae dicta sunt explicabo. Nemo enim ipsam voluptatem quia voluptas sit aspernatur aut odit aut fugit, sed quia consequuntur magni dolores eos qui ratione voluptatem sequi nesciunt.
Sed ut perspiciatis unde omnis iste natus error sit vol uptatem accusantium doloremque laudantium, total merem aperiam, eaque ipsa quae ab illo inventore veritatis et quasi architecto beatae nugit
Sed ut perspiciatis unde omnis iste natus error sit voluptatem accusantium doloremque laudantium, totam rem aperiam, ipsa quae ab illo inventore veritatis et quasi architecto beatae vitae dicta sunt explicabo. Nemo enim ipsam voluptatem quia voluptas sit aspernatur aut odit aut fugit, sed quia consequuntur magni dolores eos qui ratione voluptatem sequi nesciunt.
