Should You Transfer Your Rental Property in an LLC?
There are a number of advantages to transferring your rental property to an LLC. These benefits include:
1. Asset protection,
2. Tax benefits, and
3. Anonymity.
What is an LLC?
An LLC or Limited Liability Company is a simple and common business structure that can help protect your personal liability when you conduct business, as long as you maintain your LLC properly. Check out our blog on How To Maintain Your LLC. It provides limited liability to its owners, but also has many of the characteristics of both a partnership and a corporation. An LLC can be formed on your own; however, it is recommended that you allow a professional business attorney to assist you in creating your LLC. A business attorney can file and draft the correct required documents such as the articles of organization and a personalized operating agreement, which sets out the rules of ownership. An operating agreement is extremely important if you have business partners.
Having an LLC has a number of benefits whether you are an investor holding multiple rentals or just an individual managing a single property.
Asset Protection
One of the main reasons people set up an LLC is to protect their personal assets. As long as you maintain your LLC properly, it should provide a layer of protection for your personal assets. Owning property in an LLC can help a tenant, neighbor, or other party from going after assets that you hold individually or in another business entity. If you are sued due to your ownership of a property, the plaintiff would only be able to collect against the property owner. If the property owner is an LLC or other business entity, then the plaintiff would be limited in his or her recovery to the assets of the LLC.
Tax Benefits
There are a number of tax benefits to having real property under your LLC. An LLC has default “pass – through taxation,” which means that any income such as the profits of your rental passes to the member(s) of the LLC. You can elect to be taxed similar to a corporation by making an election with the IRS. We recommend you speak with a CPA or tax professional before you make any tax decisions.
Anonymity
A successful person can remain anonymous when they form an LLC, if they hire a business attorney to do so. The business attorney can register the LLC with the Secretary of State without ever mentioning the owner or members of the LLC. Holding a property in an LLC can help reduce the likelihood of a lawsuit, if someone is trying to find a party with “deep pockets.” Having an LLC own your rental property can help prevent someone from identifying you as the owner of the property or LLC.
Multiple Properties
What if you have multiple rental properties? If this is the case, we advise that you keep each rental property under a different business entity. If you own multiple rental properties, you will want to keep each property insulated from liability claims by keeping each one under a separate LLC. If a lawsuit is filed pertaining to one of your properties, the other properties will not be affected as long as you have maintained each LLC correctly and separately.
Timing of LLC Formation
When should your LLC be formed? It is always better to form your LLC before you purchase your rental property; however, it can also be formed after you already have the property. A benefit to creating the LLC beforehand is that it will help you to avoid notifying the mortgage holder that you are transferring the title to the LLC, avoiding any closing costs and interest rate increases associated with issuing a new mortgage, and amending your lease if you already have one in place with tenants. Some lenders even have a due-on-sale clause, where the entire loan is due upon a transfer of ownership. Transferring property from one individual to a single-member LLC is considered a transfer of ownership under most mortgage agreements and security deeds. If you choose to form the LLC after the property is already owned by you, you will want to discuss the transfer with your mortgage lender prior to taking any steps to initiate the transfer.
Conclusion
In conclusion, understanding the full view of investment property ownership ahead of time will help prevent headaches in the future. A prudent way to protect yourself and your future is to have your rental property or properties held in a Limited Liability Company. An LLC can help protect your personal assets, equity, cash, investment accounts, etc. Also, see our blog on how to How To Maintain Your LLC for more information.
If you have any questions or would like to set up an LLC for your rental property, then please call us at 770-881-8081 to discuss how we can assist you.