Transferring real estate holdings into an LLC is common for landlords or owners of rental real estate and real estate investors, and there are many reasons why they choose this form of ownership.
Often, it's for extra legal protection in case something goes wrong with the rental property. Or to take advantage of certain tax benefits available only to LLCs.
Other times, people who own multiple rental properties use LLCs to acquire a more efficient way to manage their property portfolio.
In this article, we will explain how to complete the transfer of real estate you own to an LLC, as well as some advantages of doing so and possible problems you may encounter before and throughout the process.
What Is an LLC, and Why Should I Consider This for My Real Property?
An LLC, or limited liability company, is a flexible type of business entity that enables you to have more than one owner.
It is also considered an alternative to holding real estate as a sole proprietorship under a personal name since it provides more tax flexibility.
While forming a limited liability corporation is relatively simple, each state has its own procedures to follow. The same is valid for transferring real estate to an LLC.
Therefore, it's still best to seek legal or tax advice from professional service providers before forming or holding a legal entity.
Related Article: How To Start an LLC for Real Estate?
Process of Transferring Real Estate to LLC
Say you've decided to form or already have an LLC for your real estate business; the next step will need you to transfer your realty from your name to the LLC. It involves a process similar to selling a property to another person.
A Quitclaim Deed is commonly used when transferring real estate. This document will be required to be recorded with the local county or another agency in your area. Still depends on state legislation. Following the report of these legal documents, tax consequences and legal requirements may potentially be imposed.
When transferring property to LLC, it is best to do so with the assistance of an experienced real estate attorney. An LLC that isn't formed or operated correctly could create legal problems and hold you personally liable for any damages.
Here are 7 basic steps to follow to transfer property to an LLC:
Step 1: Contact the Bank or Lender
The mortgage is not immediately transferred when you transfer a real estate title to an LLC. This implies you are still personally obligated to pay off the mortgage or any other debts secured by the rental property.
There are three things that lenders typically do in this situation:
- Allow you to transfer your real estate to an LLC as long as you stay accountable for the mortgage. This means you must continue to make regular mortgage payments and pay any late penalties.
- Consider requiring the LLC to refinance the mortgage in its name. This is most likely for LLCs with a solid credit history and revenue. Otherwise, you will very certainly be required to sign a personal guarantee to make payments if the LLC fails to do so.
- Require you to pay off the total balance of the mortgage if you have a "due on sale" clause on your terms.
Step 2: Form an LLC
If you haven't already created an LLC, you must follow this step-by-step guide to forming an LLC.
LLC formation requires filing articles of organization in your state, either by yourself or through a professional agent. It can take place online or in person. But, if you already have an LLC, you may skip this step and move on to the next.
Step 3: Obtain a Tax ID Number and Open an LLC Bank Account
You must acquire a Federal Tax ID Number, also called an EIN or Employer Identification Number, if your new LLC has more than one member, has managers, or fits certain other criteria. This may be done by completing the form on the IRS (Internal Revenue Service) website – all free of charge.
A tax ID is necessary for opening an LLC bank account, submitting tax returns for the LLC, paying employee payroll tax, and sending 1099 forms to independent contractors at the end of each year.
Once you have obtained your tax ID number, you may proceed with creating a separate bank account in the name of the LLC. If you want to protect yourself from personal liability or your personal assets, the LLC must have its own business bank account. This will keep all of your LLC finances in one place and avoid any problems with mixing personal funds with business transactions or vice versa.
Step 4: Obtain a Form for a Deed
A property deed is a legally binding written and signed document that transfers real estate ownership from the grantor to the new owner. Its requirements differ slightly from state to state; therefore, it is crucial to use a deed form that is particular to your state.
There are 2 kinds of property deeds – both deed forms are accessible at your county recorder's office or on the Internet.
This type of deed guarantees that the title of the real estate property you purchased is good and free of any claims or interests by third parties. If you transfer your title through a warranty deed, that guarantee is also granted to your LLC.
This type of deed is a simple way to transfer whatever interest you may have in the rental property to your LLC, but it doesn't guarantee a clean title or ownership of the property.
So, what form of deed should I use to transfer real estate to LLC?
It depends on your legal protection needs. Many people use quitclaim deeds to transfer a real estate title to your LLC, which suffices for transferring ownership to people you know and trust. On the other hand, a warranty deed is commonly used to transfer property between unrelated parties since it is a safer alternative.
Depending on your State, you can prepare a transfer property deed yourself or hire an attorney or title company to help you.
Step 5: Fill out the Warranty or Quitclaim Deed Form
When filling out your selected deed form, remember that you, the real estate owner, are the grantor, and the LLC is a grantee. Specify your name as written on your current deed, and use the full legal name of your LLC. Other information that you may be required to provide is the purchase price or "consideration" paid for the rental property.
However, if no money is being exchanged, visit your county recorder or state regulations to determine the minimal consideration necessary for the deed to be legitimate.
Step 6: Sign and Record the Deed
Depending on your state, you, as the grantor, may be needed to sign the transfer property deed before witnesses or a notary. In some areas, they also require the grantee to sign; therefore, someone must sign on behalf of your LLC.
File the warranty deed or quitclaim deed with the registrar or equivalent entity in your county or city that handles real estate records. When transferring property from your personal name to the LLC, it is important to get the advice of an attorney or law firm. Keep in mind that the process varies vary from state to state.
Step 7: Change Your Lease
You should update legal documents, such as leases, to reflect that the LLC, not you personally, is now the property owner. Rent should be paid to the LLC and placed into its own business bank account. Following this procedure reduces the possibility of you being held personally accountable if something goes wrong.
Advantages of Transferring Real Estate to LLC
There are many good reasons to consider forming a limited liability company for your real estate investments. However, there are some potential drawbacks to be aware of as well. The following list scratches the surface of what you can get done or encounter when putting real estate into an LLC.
Personal Liability Protection
An LLC gives its members limited legal liability for the LLC's debts and other financial obligations and the negligent conduct of other members.
If a member is sued because of something their LLC did, they are only responsible for the amount of money they invested into the LLC. Their personal assets would be safe from being seized to compensate for the LLC's lawsuits or business debts.
There are different types of tax situations for LLCs. Depending on your specific situation, you may be taxed as a partnership or disregarded entity with no tax consequences, although you should always check with your tax advisor. Additionally, you can elect S Corporation status for your LLC, which may help you qualify for a reduced tax rate.
When you hold real estate through an LLC organization, you can transfer ownership without having to record a deed and pay related charges and fees. This is especially useful for estate planning or when new investors join or depart a multi-member LLC.
Potential Challenges when Transferring Real Estate to LLC
Transfer Tax Implications
Real estate investors should consult with their financial adviser or CPA before integrating real estate into an LLC to avoid unanticipated tax consequences.
The tax consequences vary by state. A state may tax both the transfer of the property to the LLC and the revenue generated by the property. A capital gains tax may also be levied on any realized rise in the property's fair market value.
Property with a Mortgage
Transferring property into an LLC might be more complicated when you have an existing mortgage. For example, depending on your lender and mortgage conditions, you may encounter a "due on sale" clause that forces you to pay the whole sum of that mortgage when moving rental property.
How Much Is the Cost of Transferring Real Estate to an LLC?
The filing fee for your property deed, the legal document you need to transfer real estate to an LLC, is typically around $100, depending on your state.
How Much Is the Cost of Forming an LLC?
The average cost of forming an LLC is $1,000 or more, depending on the state in which the LLC is formed. This price includes the cost of:
- Business name reservation fee
- Registering your LLC
- Professional fees for creating an operating agreement for the LLC
- Filing the LLC articles of organization with the state
- Processing fees
- Registering an out-of-state business
What Is the Advantage of Putting Real Property in an LLC?
One of the main advantages of putting real property in an LLC is to help protect you from being held liable for any problems with the property. It also makes it easier to track your assets and keep them separate from the rental property. Finally, the LLC has the tax benefit of pass-through taxation, saving you money on your taxes.
How to Transfer Real Estate to an LLC...
By holding rental property in an LLC, you can have liability protection for your other business and personal assets if something goes wrong. Another major advantage of creating an LLC for rental properties is that it makes filing year-end taxes easier.
If you are thinking of transferring property to an LLC, it's important to consult with an experienced attorney or law firm who can help weigh the benefits and potential drawbacks of doing so. By understanding all of the implications involved in this type of transaction, you can make a more informed decision about whether or not this is the best option for you and your business.