Do you own one or more rental properties? Consider putting them into a limited liability company or LLC to gain additional liability protection. This can limit personal liability to protect your other business and personal assets in the event of a lawsuit. You could even consider creating an LLC for each rental property for additional protection. Continue reading to know more about transferring property to LLC.
Can You Transfer a Rental Property to an LLC?
Yes, transferring rental property to an LLC is possible and can offer various benefits, such as limited liability protection and tax advantages. If you have a mortgage on the property, you’ll need to confirm with the lender about any additional requirements and whether you’re allowed to transfer the property to an LLC.
In fact, for many rental property owners, holding the property in an LLC makes a lot of sense. First, it’s easier to keep business and personal expenses separate. It offers asset protection and more. And you can even form an LLC as a non-resident. Additionally, you could buy a house with the LLC, eliminating the need for a transfer later on.
Why Should You Transfer a Rental Property to an LLC?
Here are the key reasons why you should consider transferring a rental property to an LLC:
1. Asset Protection
Transferring property to an LLC can protect personal assets from business liabilities. This means that if the property owner is sued for some reason, your personal and other business assets separate from the LLC are protected. As you can never guarantee how renters will behave, you have peace of mind knowing that your other personal property is protected. The rental property doesn’t expose you to unnecessary risk.
2. Tax Advantages
An LLC offers pass-through taxation, which means you can report any rental income or related business expenses on your income tax return. This can simplify administration and reporting and make keeping business and personal expenses separate easier. This, in turn, can make year-end tax reporting simpler.
In addition, you can deduct property operating expenses before passing through income to LLC members.
3. Business Organization and Structure
Transferring property to an LLC can streamline business operations and management. An LLC offers flexibility in terms of ownership and decision-making. You could even create a single-member LLC, which has the advantages of minimal paperwork, pass-through taxation, and simplified decision-making.
Transferring a Rental Property to an LLC in 4 Steps
If you’re ready to transfer a rental property to an LLC, here are four simple steps to take.
1. Select the Appropriate Property
Not every rental property can be transferred to an LLC. Of course, you must own the property and be the title holder to transfer a property to an LLC.
In addition, some mortgage lenders will only allow the transfer of a property to an LLC after the mortgage is paid in full. Other mortgage lenders will allow you to transfer the title if you remain responsible for the mortgage and on-time payments. Speak with your mortgage lender to determine whether you can transfer the property to an LLC.
2. Form an LLC
Creating an LLC is simple. You can use an online LLC formation service or file the Articles of Organization with your Secretary of State. When filing an LLC, you’ll need a registered agent and registered address in the state where the LLC is formed. You’ll also want to check state-specific requirements and regulations.
After forming the LLC, you’ll want to draft an operating agreement signed by all LLC members, obtain an EIN, and open a business bank account. You’ll also need to obtain local or state permits or business licenses.
3. Transfer Property Title
You will need to file a quitclaim deed or warranty deed to transfer the property to the LLC. You will need to file this deed with the county clerk. As an individual owner, you are the grantor, and the LLC is the grantee for the filing.
It’s essential to update records and documents related to the property transfer. For that reason, a title company can assist with the title transfer. A local title transfer company will understand the individual state requirements and can help ensure you meet all of them. Changing property ownership from an individual or another entity to an LLC usually takes 4 to 12 weeks.
4. Adhere to Legal and Tax Obligations
After transferring the rental property to the LLC, it’s important to maintain all compliance requirements, such as obtaining necessary licenses and permits. At a minimum, most states require all LLCs to file an annual report.
You can check with the Secretary of State and local officials to ensure you’re meeting all requirements. It’s essential to maintain professional accounting practices and annual reporting obligations to keep the LLC in good standing and to protect the rental property after you’ve made the transfer.
When Should You Consider Transferring a Rental Property to an LLC?
While transferring a rental property to an LLC makes a lot of sense for many property owners, there are key factors to consider when deciding whether to make the transfer. If you hold a mortgage on the property, there are times when lender rules or increased expenses make transferring to an LLC problematic. However, for property owners who don’t have a mortgage, the pros generally outweigh the cons of transferring property to LLC.
Pros of transferring a rental property to an LLC:
- Liability protection: An LLC can protect your personal assets in case of a lawsuit involving the rental property.
- Property protection: If you own multiple rental properties, you can protect them from lawsuits by keeping each rental property in a separate LLC.
- Simplified administration: An LLC makes it easier to separate business and personal expenses without requiring as much administrative work as a corporation.
- Pass-through taxation: You can report rental property income on your individual income tax return.
- Simplified partnerships: In the case of multiple property owners, the LLC’s operating agreement will clearly define ownership percentages and management responsibilities.
- Business deductions: You can deduct allowed business expenses before passing through rental income to LLC owners.
Cons of transferring a rental property to an LLC:
- Time: Additional paperwork and administration compared to private ownership.
- Cost: The cost of annual reports can be hundreds of dollars annually.
- Mortgage changes: Both mortgage and insurance rates could increase. And some mortgage lenders won’t let you transfer a property until the mortgage is paid.
- Taxes: In some cases, transferring property to an LLC may trigger unintended tax consequences. Speak with their financial advisor or CPA before making the transfer.
What Are the Costs of Transferring Rental Property to an LLC?
The initial LLC formation costs are the base costs associated with transferring rental property to an LLC. These vary by state and could be as little as $40 (Kentucky) or as much as $500 (Massachusetts). However, with a registered agent service or a business formation service, this could be another $50 to $200 or more.
In addition, if you have a mortgage on the property, you will have to agree with your lender whether you will close the existing loan and issue a new mortgage in the name of the LLC, or continue with your name on the mortgage. In case of closing the mortgage, you may need to pay closing costs and potentially a higher mortgage interest rate or insurance fees.
Finally, there are potential capital gains tax implications. For example, if your rental property has a current cost basis of $200,000 and a fair market value of $250,000, the property’s value transferred to the LLC is taken as the current fair market value of $250,000. That $50,000 in capital gains gets passed on to the LLC and its members. Therefore, it’s important to speak with a real estate attorney before transferring the property if it has appreciated significantly in value.
Considerations When Transferring Property to an LLC
Here are key points to consider before transferring a property to an LLC:
1. Additional Legal and Administrative Requirements
Setting up and maintaining an LLC involves additional legal and administrative requirements, such as registering with the state, filing annual reports, and adhering to certain financial and operational guidelines. You could get help from a real estate attorney, accountant, and/or tax advisor to ensure you’re meeting all compliance requirements.
2. Financing and Mortgages
Financing and existing mortgages can be affected by property transfer to an LLC. This can include increased mortgage interest rates or mortgage insurance rates. Before shifting a mortgage to the LLC, consider negotiating with the lender about potential refinancing options, including considering shifting the mortgage to a different lender. You can also discuss the possibility of remaining as the primary mortgage payer even after you transfer the property title to the LLC.
3. Insurance Coverage
Transferring property to an LLC may impact insurance policies and coverage. It’s important to discuss implications with insurance providers before the transfer. Then, you will need to update insurance providers and policies after the property transfer.
Protecting Your Real Estate Investments
Creating an LLC for your rental properties can be a smart way to secure your investment while protecting your personal assets. Do you need help setting up an LLC? doola formation services offer low-cost LLC formation in all 50 states, guaranteed. doola will also help you get an EIN and open a business bank account so you can focus on your rental business and other investment opportunities. Get doola so you’re ready to buy a rental property or transfer one to an LLC!
Can I transfer a rental property to an LLC after it has been purchased?
Yes, you can transfer a rental property to an LLC after it has been purchased. However, if it has appreciated significantly, there can be capital gains tax implications. Likewise, if you have a mortgage on the property, you could end up with higher mortgage interest rates or new closing costs with the transfer.
Can I transfer a rental property held in a trust to an LLC?
Yes, you can transfer a rental property held in a trust to an LLC, depending on the specifications of the trust. You should speak with a real estate attorney to understand the implications of your specific situation.
Is transferring a rental property to an LLC reversible?
After you transfer a rental property to an LLC, you could transfer it back to an individual owner. However, this could involve significant additional expenses.
Can I sell a rental property held by an LLC?
Yes, you can sell a rental property held by an LLC. You can also transfer ownership of the LLC, which may be an attractive option for some real estate investors.
Can I transfer a rental property to multiple LLCs?
You can have multiple LLCs hold a rental property if each LLC is a “member” of the LLC that owns the rental property. Otherwise, a single LLC will hold a rental property.