Putting property in an LLC is a common asset protection strategy for new landlords, businesses, and real estate investors. This process is most often used for liability protection when owning real estate investments. This is where the owners’ personal assets are shielded from liability from lawsuits or debt collection actions involving their property.
This article will review what you need to know about putting property in an LLC, how to do so, and if it’s right for your situation. On top of that, we’ll also cover how our services can help simplify the potential complexities of these situations.
Putting property into an LLC, whether it’s a rental property, vacation property, or another asset, is a common asset protection strategy employed by landlords and real estate investors. The process is designed to shield the owner or real estate investor from potential liability involving their property or properties. It can also offer tax advantages along with other notable benefits.
However, the process is a bit more involved than moving money around or setting up an office. To ensure your books are in good standing and avoid potential tax problems, you’ll need to go through the proper steps and document them throughout the transaction.
If you have a mortgage or loan on the property you want to transfer to an LLC, you need to contact your lender to see if the property’s title can be transferred to the LLC under the current loan’s terms.
Sometimes, the lender may require a personal guarantee, charge a one-time fee to transfer the loan, or even increase your interest rate. In addition, if the mortgage has an acceleration clause, the borrower may need to pay off the existing loan before getting a new loan under the LLC.
Next, you’re going to want to file your Articles of Organizationwith the Secretary of State (or whatever state agency handles business formation in your state) to form your LLC properly.
The Articles of Organization, also called a Certificate of Organization or a Certificate of Formation in some states, usually includes basic details like the company’s physical address, its registered agent, and member contact information.
Operating agreements often describe the rights and responsibilities of LLC members, how ownership is divided among members, how conflicts between them are handled, what happens if a member wants to sell their portion of the business, how profits are divided, and how members can be removed or added to the LLC.
Your federal employer identification number, or EIN, effectively acts as an identifier for your business, much like a Social Security number. After you’ve formed your LLC, you can file with the IRS to obtain your EIN at no additional charge. Most LLCs are required to have an EIN, including those with multiple members or employees, and most banks require an EIN for opening a business bank account.
After obtaining your EIN, you can open a bank account for your LLC. The bank will usually ask for your EIN and approved Articles of Organization to show that your LLC is in good standing. You should establish an LLC bank account to keep LLC funds separate from your personal funds.
After completing the steps mentioned earlier, you’ll want to file a quitclaim deed or warranty deed to transfer the property to the LLC. When filing with the county clerk, remember that you’re the grantor, and the LLC is the grantee. Depending on your situation, you may want to contact a local title company for additional assistance.
Once the title has been transferred, you’ll want to update any legal documents pertaining to the property. These include leases, utility accounts, city permits, and contracts with property managers, which should all be updated to list the LLC as the owner or responsible party. In addition, because the LLC is new, utility companies may require you to pay a refundable security deposit before creating an active account for it.
Whether you’re a property owner or looking to become one, you may wonder if you should put your rental property in an LLC. Like any scenario, there are advantages and disadvantages to placing rental property in an LLC, so it’s important to understand them to make an informed decision.
One of the biggest benefits of putting property in LLCs is that it protects yourself and other members from personal liability. This means that in the event of a lawsuit or a collection action, the LLC’s assets (the property itself) are at stake, not your personal assets or those of the other members. While this holds true in most cases, it’s important to note it may not always be the case, depending on why the lawsuit or legal action is being brought on.
Another key benefit of establishing an LLC for an investment property is taking advantage of pass-through taxation. This means the LLC itself doesn’t pay federal income taxes, and any profits or losses will be reported on the owner’s or owners’ income taxes only. This is because the LLC is treated as a sole proprietorship or partnership, meaning that it doesn’t pay federal income taxes at the business level.
With the benefits outlined above, you may be wondering if putting personal property in an LLC is right for you. Putting a home or other personal property in an LLC can be tempting, but there may be better options for your specific situation. There are several caveats to this type of business structure that may make it a bad fit for you, especially if the property is your primary residence.
A property in an LLC can provide tax and liability benefits for rentals and homes people intend to flip or quickly resell. However, you may actually be missing out on benefits and exemptions specifically meant for homeowners by placing your primary property in an LLC. On top of this, this structure may affect your financing and potentially increase insurance costs.
It’s important to remember that forming an LLC is not a free process and that there are some fees and other expenses involved.
Potential fees can include an optional name reservation fee, a fee for filing your Articles of Organization, and other fees that may be recurring, such as filing an annual or biennial report.
While it may seem intimidating at first glance, you don’t have to go through the process of putting property in an LLC by yourself. Instead, we offer customers an LLC formation service to help you every step of the way — all for $0 down to get started today.
Furthermore, our suite of products and solutions provides the support needed to hit the ground running with your property LLC. We’re focused on making LLC formation easy so that you can focus on what counts — your business.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Putting a rental property in an LLC helps shield the property owner from liability in the event of a lawsuit, debt collection, or other legal action. You can also better keep business and personal assets separated, and owning an LLC gives you more tax options.
While you can technically place your primary residence in an LLC, putting a house in an LLC may have negative tax ramifications, including losing potential exemptions you may otherwise qualify for.
Rental income is a common form of nonbusiness income. However, if you’re actively involved in the business of renting out properties, then that income would be considered business income.
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