Putting Rental Property into an LLC
Clever thinking with money and business
Transparent, Upfront Pricing On Your Legal Work
Digital-Forward Practice Means Fast Work Turnaround
A Quick Summary about Using an LLC for a Rental Property
- Putting your real estate into a Limited Liability Company is typically a good idea, but comes with costs.
- An LLC can protect you and your rental properties from lawsuits.
- A lawyer can help you get everything done correctly.
Rental Properties in an LLC: Here’s What to Consider.
The Benefits
Here are some of the benefits of putting a rental property into a Limited Liability Company instead of keeping it in your own name:
- Liability Protection: An LLC can help protect your personal assets from liability in the event of a lawsuit or other legal issue related to your rental property. This is because the LLC is a separate legal entity from you, and your personal assets are not considered part of the LLC’s assets. Without the limited liability, you face personal liability if something awful happens at your rental property. Did a doorknob come off the door when someone opened it, causing them to fall down a flight of concrete stairs? (real case from a client of ours!) Did a roof beam collapse on the table during dinner time? (another real case, unfortunately!). Insurance is an excellent first line of protection, but limiting your legal liability through an LLC is a cheap extra layer of protection.
- Pass-through taxation: The income from an LLC is typically passed through to the members of the LLC, who are then taxed on their individual income tax returns. This can save you money on tax benefits, as you may be able to deduct certain business expenses and personal expenses related to your rental property from your rental income. It is a vital benefit of long term real estate investing and you will not face double taxation.
- Asset protection: An LLC can help protect your personal assets from creditors. If you have creditors who are trying to collect a debt from you, they may not be able to seize your rental property if it is owned by an LLC.
- Flexibility: An LLC can be structured in a variety of ways, which gives you flexibility in how you manage your rental property. For example, you can choose to have one or more members of the LLC, and you can decide how the profits and losses of the LLC will be distributed.
- Easy Estate Planning: Leaving a portfolio of properties to your children is cumbersome, but leaving them an active, cash-flowing business is welcome. Putting property into an LLC, especially if you have properties in several states, is a vital part of estate planning.
The Drawbacks
However, there are also some drawbacks to putting a rental property into an LLC. These include:
- Cost: Setting up and maintaining an LLC can be more expensive than simply owning a rental property in your own name.
- Legal fees: If you have any legal issues related to your rental property, you may have to pay higher legal fees if the property is owned by an LLC.
- Complexity: Managing an LLC can be more complex than simply owning a rental property in your own name. You will need to keep track of the LLC’s finances and keep separate expenses and bank accounts.
- Tax Treatment: You may lose a primary residence tax credit on your property taxes if you put a multi-unit rental property into an LLC that you also live in.
Additional Considerations
Ultimately, the decision of whether or not to put a rental property into an LLC is a personal one. You should weigh the benefits and drawbacks carefully before making a decision.
Finally, some additional things to consider when deciding whether or not to put a rental property into an LLC are:
- The size of your rental portfolio. If you only have one or two rental properties, you may not need to put them into an LLC. However, if you have a larger rental portfolio, an LLC can provide more protection for your personal assets.
- The location of your rental properties. If your rental properties are located in different states, you may need to form an LLC in each state.
- The type of rental properties you own. If you own commercial properties, you may need to form an LLC even if you only have one or two properties.
Frequently Asked Questions
Will my tenants have to sign new leases if I put my property into an LLC?
If your leases have an assignment clause, you do not have to get new signatures. Otherwise, you may need to get new signatures, or otherwise set up a management agreement. Your lawyer can help you determine the right solution.
Will it cause problems with my mortgage?
Before transferring a property to an LLC, make sure to read your mortgage. Almost all of the time, they contain a “due on sale clause” or “acceleration” clause. This means that the lender can call in the loan as due-in-full when you transfer it. However, many federally-backed loans cannot be accelerated if you are transferring to an LLC you own. For example, Sallie Mae prohibits acceleration to an LLC owned entirely by you, under most circumstances. If you are in doubt, your lawyer can let you know if a transfer would violate a mortgage or a restriction, such as an owner-occupant requirement.
Will I need to form an LLC to transfer my property?
If you do not have an LLC, your lawyer can help you create one. If you have an existing LLC, then you should put some thought into whether you should put your real estate into it or create a separate company. We can help you with forming an LLC if you require one.
I am investing with other people, do we need an Operating Agreement?
If you have a Limited Liability Company, then you absolutely should have an Operating Agreement! Think of it like the constitution of your company. You set the rules for joining, leaving, voting on leaders, and changing the document itself. Your Articles of Organization just prove that the Company exists. An Operating Agreement sets its rules. Banks and lenders insist on seeing an Operating Agreement before they lend, so you should create one if you do not already have one established.
If you are considering putting a rental property into your LLC, give us a call. If a transfer is the right decision for you, we can help you establish an LLC and create a deed to transfer the property. This typically takes two business days and we can let you know the entire cost, including all of the county taxes paid, upfront.
