Using an LLC to Buy a House: A Starter Guide

Whether you’re planning to purchase a property to reside in or as an investment opportunity, you might be considering using an LLC (Limited Liability Company) as the purchasing entity, rather than your name. While it’s indeed a feasible approach, the process can be rather complex and may not be beneficial for all circumstances. 

Your purpose for buying the property will substantially factor in whether utilizing an LLC is the right strategy for you. In this article, we explore the advantages, disadvantages, and intricacies of acquiring a house through an LLC.

What Is an LLC?

An LLC is a separate legal entity that combines the concepts of a corporation and a partnership, offering liability protection for its owners (also called members) while maintaining a flexible management structure. The LLC structure can be beneficial for the ownership and management of real estate properties for various reasons.

Who Should Consider Buying a House with an LLC?

Buying a house with an LLC makes sense under certain circumstances when the potential advantages outweigh the drawbacks. This corporate structure typically appeals to real estate investors, house flippers, and other individuals seeking asset protection or tax benefits when purchasing a property.

Real estate investors: Real estate investors may choose to buy a house with an LLC to protect their personal assets and limit their liability. Using an LLC can also make it easier to manage multiple properties and keep them separate from personal assets.

High net worth individuals: High net worth individuals may also choose to purchase a house with an LLC to protect their personal assets and limit their liability. Additionally, using an LLC can provide tax benefits and help with estate planning.

Homeowners who rent out their property: Homeowners who rent out their property may choose to use an LLC to protect their personal assets and limit their liability in case of a lawsuit. Using an LLC can also provide tax benefits and make it easier to manage rental properties.

How to Buy a House With an LLC?

Here are the steps you’ll need to take to buy a house with an LLC:

1. Establish a Limited Liability Company: Before purchasing a house, you must first set up your LLC. This involves choosing a name for your LLC that is unique and hasn’t been registered in the state where the property is located. You’ll also need to file Articles of Organization with the state’s Secretary of State office along with the required filing fee.

2. Obtain an Employer Identification Number: You’ll need a unique EIN from the Internal Revenue Service (IRS) to allow your LLC to pay taxes and be recognized as a distinct legal entity.

3. Open a bank account for the LLC: It’s essential to create a separate bank account for your LLC, as this will help maintain a clear line between your personal and business finances. This is crucial for tax and liability purposes.

4. Choose the property: Search for a suitable residential property that meets your investment objectives and preferences. This may involve working with a real estate agent, researching the local real estate market, and analyzing factors such as neighborhood growth potential, nearby amenities, and the long-term outlook of the area.

5. Funding the LLC: Ensure that your LLC has adequate funds to cover the purchase price and any associated costs, such as taxes, insurance premiums, and closing fees. You can fund the LLC through personal funds, loans, or investments from other members of the LLC. If you require additional financing, consider approaching lenders who specialize in working with investment properties and LLC borrowers.

6. Make an offer through the LLC: Once you have identified a suitable property, present an offer to the seller using the LLC’s name as the purchaser. Working closely with a real estate attorney or an experienced real estate agent is highly recommended to ensure all legal requirements are met and the transaction is properly executed.

7. Conduct due diligence: Once your offer has been accepted, thoroughly inspect the property for any potential issues, such as structural damage or outstanding liens. You may want to engage a professional inspector and a title company to conduct thorough assessments of the property’s condition and title, respectively.

8. Close the transaction: Work with an experienced real estate attorney or agent to finalize the transaction, ensuring that the LLC is listed as the property owner on all relevant documents. This includes the deed, mortgage agreement (if applicable), and any other necessary legal documents.

9. Register your property: After closing the transaction, register your property with the appropriate local government office to ensure that your LLC is formally recognized as the legal owner. Additionally, update your LLC’s records to reflect the property’s purchase and document any corresponding loans or investments.

10. Manage the property as an LLC-owned asset: As part of your LLC’s activity, implement a management structure to oversee the property, which may involve hiring a property management company, selecting tenants, and maintaining records for tax and accounting purposes. By purchasing and managing the property through an LLC, you can protect your personal assets and limit personal liability associated with owning the property.

Remember that real estate laws and regulations vary by state, so you may want to consult a real estate attorney. 

Can You Transfer a Property You Already Own to an LLC?

Yes, you can buy a property in your name and then transfer the title to an LLC later on. However, before doing so, there are some things to keep in mind. If you have a mortgage on the property, transferring the title to an LLC could trigger the due-on-sale clause and the mortgage acceleration clause, which means you would need to pay back the full mortgage amount. Also, your mortgage or owner’s title insurance policy may not be valid if the LLC is not entirely owned by you. Depending on where you live, there may be real estate transfer taxes that you need to consider when transferring the title back and forth. To make sure you understand all the implications of transferring the title, it’s best to talk to a tax advisor before making any decisions.

Can I Buy a Property in My Own Name and Transfer It to the LLC Later?

You can buy a property in your name and later transfer it to an LLC through a process known as “title transfer.”

To do so, you’ll want to find a qualified real estate attorney who specializes in title transfers. They’ll be able to guide you through the process, which involves transferring the deed of ownership from your name to that of the LLC. This is done by filing a quitclaim deed with the local county recorder’s office. The quitclaim deed must list all of the parties involved, including yourself and the LLC, as well as any relevant information related to the purchase. Once you have filed this document, the title should legally be transferred from your name to that of the LLC. 

How Can You Get a Mortgage for an LLC Purchase?

Getting a mortgage for a property with an LLC structure can be challenging because many residential lenders are hesitant to lend money to LLCs. This is because LLCs offer limited liability protection, which means that members and shareholders are not personally responsible for the debts of the LLC or corporation. As a result, banks may view LLCs as a higher risk for defaulting on a loan, which makes it difficult to secure a mortgage.

Banks may require personal guarantees from the LLC members or shareholders, which could undermine the limited liability protection offered by the LLC. If the LLC defaults on the loan, the members or shareholders could still be personally responsible for paying it back.

Consult a lender that specializes in loans for business entities such as LLCs. This lender will be able to provide you with more specific terms and conditions tailored to your needs. Once you have selected a lender, they’ll require evidence of the LLC’s financial standing and credit history. Prepare to provide them with financial documents such as personal assets, tax returns, and bank statements. 

You may be asked to provide additional documentation regarding the structure and ownership of the LLC. The lender will then assess these documents to determine whether or not they can provide you with a loan. 

Advantages of Buying a House with an LLC

This approach might not be ideal or necessary for everyone, but it can make sense for particular individuals and situations. Here’s a closer look at some advantages of buying a house with an LLC:

Asset Separation

This means that the LLC is a separate legal entity from its members, and the property is owned by the LLC, rather than by individuals. This can help protect personal assets in case of legal action against the property.

For example, if someone is injured on the property and sues the LLC, the member’s personal assets may be shielded from the lawsuit. Only the LLC’s assets are at risk, which typically includes the property and any income generated by it.

Limited Liability

The most significant benefit of purchasing a property through an LLC is the shielding of personal assets from liabilities and judgments related to the property. If a legal issue arises concerning the property, creditors cannot go after the owner’s personal assets, as the LLC is considered a separate legal entity.

Privacy

Conducting a real estate transaction through an LLC provides a layer of privacy for the owners by keeping their names off public records. This is especially helpful for high-profile individuals, such as celebrities or wealthy investors, who prefer to maintain a level of anonymity.

Tax Benefits

LLC owners may gain tax advantages, such as deductions for property taxes and mortgage interest. The profits from the property may be passed onto the owners, who can report them on their personal tax returns, thereby avoiding double taxation.

Easier for Investors to Find Partners

By forming an LLC, investors can pool their resources and share the costs and risks of purchasing a property. This can be particularly beneficial for investors who may not have the funds needed to purchase a property alone. 

Keeps Business and Personal Separate

Buying a house with an LLC can provide a level of protection for personal assets and make it easier to manage multiple properties, helping to keep business and personal assets separate. 

Things to Consider When Buying a House with an LLC

While there are many potential benefits to buying a house with an LLC, there are also several things to consider before making this decision.

Cost

Cost can be a significant factor when buying a house with an LLC. Forming an LLC can be expensive and may require ongoing fees, such as state filing fees and annual report fees. The LLC may also need to pay for its insurance policies, such as property insurance and liability insurance.

Mortgage Difficulty

Obtaining a mortgage for a property owned through an LLC can be more difficult, as many lenders are hesitant to provide financing to such entities. Buyers may face higher interest rates and down-payment requirements, making it less advantageous for financing residential properties.

You’ll Pay More

You may pay more when buying a house with an LLC. For example, some insurance policies may charge higher premiums for LLCs, and some title insurance policies may not cover properties owned by an LLC. 

LLCs may also pay higher property taxes in some states.

Buying property through an LLC involves additional fees and paperwork, such as filing fees, annual reports, and separate tax returns. If you manage the LLC incorrectly or fail to maintain the separation between personal and business assets, you risk losing the protection provided by the LLC structure.

Limited Financing

Banks and other lenders may be less willing to provide financing to LLCs, which can limit the options available for purchasing a property. You’ll need to find a lender that works specifically with LLCs. 

Loss of Capital Gain Benefits

When an individual sells a primary residence, they may be able to exclude up to $250,000 of capital gains from their income. However, if the property is owned by an LLC, the LLC may not be eligible for this exclusion, potentially resulting in higher taxes for the owners.

Buy a House With an LLC and doola for a Winning Combo

Buying a house with an LLC can be a smart financial move for investors looking to protect their personal assets and share the costs and risks of purchasing a property. However, the decision to form an LLC should not be taken lightly, as it comes with its own set of challenges and potential disadvantages.

If you’re thinking of buying a house with an LLC, consider partnering with doola to help manage your finances and keep your business running smoothly. When it comes to making smart financial decisions, it always pays to have a little help from the experts!

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