How to transfer real estate to an LLC is like selling your property. It stands for limited liability corporation, and the main reason people do this is to protect themselves from liability when a third party, like a tenant, is involved with the property. You can accomplish the transfer in three steps:
- Form the corporation
- Complete a quitclaim deed
- Record the deed
Whether you should use one depends on your situation and the type of property you own. There are many tax and liability shelters available. You should talk to your lawyer, accountant, and/or financial advisor about what is the best solution for your own circumstance.
Transfer Home to an LLC
Generally, you should put your primary residence in a trust rather than an LLC. A trust better protects your home from probate and taxes, while the corporation protects you from liability. Here are some reasons to use a trust for the house you live in:
- You keep capital gains deductions, $250,000 for single and $500,000 for joint filers
- In most states, you keep your homestead exemption
- You can obtain hazard insurance easier
- It doesn’t trigger the due on sale clause in your mortgage
Finally, a trust avoids probate. For most people, a trust account for your house is better, and the corporation better for investment properties. Your situation may be different, though; especially if you have liability issues associated with where you live. Each state has different laws, and each person’s situation is unique. Talk to a good lawyer and/or estate planner before you make any decision.1
Transfer Rental Property to an LLC
You can transfer your rental or other investment properties into an LLC, even if you have a mortgage on it. Here is what you need to do:
- Contact your lender about your mortgage – most have a due on sale clause, and you must deal with that before you can do anything else.
- Form a corporation – This is simpler than it used to be. In fact, you may be able to file one online, Legal Zoom Is one place that helps you file online.
- Get a tax ID number and open a bank account for it.
- Fill out a warranty or quitclaim deed, sign it, and file it at your county clerk’s office.
- Change the lease – amend any leases to show that the company is the landlord now, and not you.
This is an outline of the process. It may seem simple, but it often isn’t, especially if you have a mortgage. Your lender may let you transfer title as long as you remain fully obligated. More often, though, they make you refinance the mortgage with the company as the borrower. If you must refinance, then steps 2 – 4 become redundant.2
Should You Put Rental Property in an LLC?
How to transfer real estate to an LLC is less important than should you. Whether you should or shouldn’t put your rental property in an LLC depends on your personal situation. Here are some things to think about before you make your decision:
- The Protect your assets – shields your personally from being sued, only the company faces litigation.
- Pass-through taxation – any income passes through to the owner(s), and they pay the taxes. This can get complicated, especially if there is more than one owner.
- It’ not free – You may set it up yourself or you can hire a lawyer. Then you have to register it with your state and pay a fee. On top of that, many states have annual fees.
- Insurance also protects you – a dwelling policy protects the property. You can add loss of income to that policy. Finally, you can get an umbrella to protect you from being sued.
Insurance may not cover your total cost, though. If someone sues you and wins more than what your policy covers, they will still go after you personally. If it’s in a corporation, that can’t happen. They can only take the assets of the company.3
Should You Have an LLC for Each Rental Property?
You should form a new LLC for each investment property. You want to separate your investment to protect your personal assets. In the same way, you want to separate your investments from each other. If you form a new company for each investment you can:
- Reduce asset liability for each property
- Separate finances and more easily see which is more profitable and manage finances more efficiently
- Sell the corporation and avoid transfer taxes in some states
The primary reason to have each property owned by its own company is a liability. If someone sues you because of an issue with one property they are limited to the assets of that one entity. They cannot seek your personal assets or the assets of your other companies.4
How Many Properties Can an LLC Have?
There is no limit on how many properties you LLC can own. If you own many properties, then having one company for each property becomes impractical. So, how many companies should you have? It depends on your risk aversion, organization skills, and the qualities of the properties.
- High equity properties should have their own company
- It makes sense to group low equity properties together
- Consider a series LLC
Remember the goal is to reduce risk. You must weigh that goal against the benefits of streamlining your organization. Don’t have too many investments in one corporation that you can’t handle the risk.5
Final Thoughts on How to Transfer Real Estate to an LLC
How to transfer real estate to an LLC may be as simple as recording an executed deed if you don’t have a mortgage. Lenders don’t want any change of ownership if you have a mortgage, however. So, if you want to move property with a loan you should contact your bank before doing anything.
A better question is, should you? That question depends on your situation and the property itself. You should not move your primary residence into one in almost all cases. There may be an exception if you are house hacking. Corporate structures are more suited for investments, but even that depends on how many you have and how much equity you have. It also depends on your risk aversion.
Before you start changing the ownership of any of your properties you should get advice from a local financial professional, a financial and/or estate planner. You may also need legal or tax advice as well. There are many options for this important decision, and you want to make sure you make the right choices.