An LLC can get a mortgage. However, most investors who use a corporation to own property pay cash for it because there are limitations to consider. People who finance rental properties often buy them in their own name and insure the property with an umbrella policy. An LLC is a limited liability corporation, and some important restrictions for your corporation financing an investment property include: 

  • Higher interest rate 
  • Higher required down payment 
  • Limitations on fixed-rate financing 

The government supports traditional (held by a person or living trust) mortgages, and banks can sell them to Fannie Mae or Freddie Mac. Therefore, banks give better terms to these loans because they are more stable and secure.1  

Can an LLC Get an FHA Loan? 

An LLC can get a Federal Housing Administration (FHA) loan. The government started this program to help people buy a place to live. These are federally backed and allow you to make a smaller down payment. To be eligible you must:2  

  • Be a sole proprietorship, partnership, LLC, or S corporation 
  • Own at least b25% of the business 
  • Have two years of documented experience as a business owner or prove experience in other ways, such as employment in the same industry 
  • Provide two years of tax returns and possibly a credit report and/or profit-loss statement 

These loans cannot be used for a second or vacation homes. You also can’t use them for rental or other types of investment properties. There are exceptions, though. To understand the exceptions let’s look at a couple of the rules: 

  • The new owner must move in within 60 days and live there for most of one year. 
  • The owner can refinance with an FHA streamline without meeting the occupancy requirement. 

There are other rules too, but these two allow investors to use an FHA loan. The government allows you to buy a multi-unit building and use an FHA loan as long as you live in one of the units.  Also, the building can be no larger than four units.  

You can purchase a home using an FHA loan, move out of it after a year, use it as a rental property, and then refinance it with another FHA loan. As long as you qualify you don’t have to meet the occupancy requirement to refinance.3  

Can I pay rent to my LLC? 

You can pay rent to your own LLC, and in some cases, it makes sense. For most people, though it won’t. These are schemes to avoid taxes, and they can be divided into two broad categories: 

  • A homeowner putting his primary residence in an LLC and then renting it back. 
  • A business owner separating the business into one company and the property into another. 

The first case became popular after the government limited itemized deductions on personal income taxes. The company gets to deduct mortgage interest, property taxes, utilities, and even depreciation. The problem with this is that you create phantom income and losses. The rent is not a deduction for you, but it is income for the company. If you don’t have enough expenses to offset the rent then you create phantom income. If your expenses exceed the rent then you will probably have non-deductible passive losses.  

A depreciation deduction lowers your tax basis which increases your taxable gain when you sell the house. You also lose the capital gains deduction ($250,000 filing individually or $500,000 filing jointly) if you do this. So, there is no reason to implement this complicated scheme. 

Where it does make sense is when you own a business and the building it operates in. Rent is a business expense and income, so it doesn’t create any phantom profits or losses. It reduces your taxes and liability. If the business goes bankrupt, you can protect the building from creditors. If the building gets sued, you can shelter the business from the claimant’s litigation. 

These are very complicated legal and accounting structures, though. Consult with a certified public account (CPA) who knows the laws in your state.4  

Tax Consequences of Transferring Real Estate to an LLC with a Mortgage

Tax consequences for transferring property can be complicated, but there are a few basic principles that apply across the country.  

  • The government views the company as an individual – it can own both personal and real property, can sue and be sued, files individual tax returns. 
  • Limited liability – the company’s assets can’t be taken to pay personal debts. Likewise, an owner’s assets can’t be taken to pay the corporation’s obligations, unless he/she personally guaranteed the debt. 
  • You can control your assets by controlling the company – it can own personal, real, and intangible property. Then, you can buy and sell it while you enjoy reduced liability with creditors. 

Although the company’s purpose is to protect assets from creditors, there are two ways they can breach this security and get to your personal property. Creditors can place a lien on your personal property if you comingled it with the company’s assets. They can also do this if you committed fraud regarding the corporation or didn’t put sufficient assets in to keep the company solvent. The second way is if you committed fraud by transferring property to the company only to avoid creditors.  

LLCs are business vehicles, and so they protect assets. The idea is that they pay taxes on the income they generate. They pay those taxes either as an individual or pass them through to the owner. That is why it’s not a good idea to put any personal property, including your primary residence into one. There are better options for protecting personal property.5  

Final Thoughts on How Does an LLC Get a Mortgage 

How does an LLC get a mortgage? They are business entities and their purpose is to make doing business easier. Asset protection and certain tax exemptions are two of the benefits. There are businesses that do own real estate and hold mortgages, so banks do lend to corporations to buy it.  

However, it is never a good idea to mingle your business with your personal property. There are many schemes out there to use businesses to give tax advantages or avoid taxes on your primary residence. Most of these simply exchange one tax liability for another. Talk to a good certified public accountant (CPA) before you try any of these schemes.  

References 

  1. Up Counsel 
  2. SMB CEO 
  3. Investopedia 
  4. The Daily CPA 
  5. Legal Beagle