How to Transfer Real Estate to an LLC? (2024) The Easy Way
The ownership of real estate is transferred into an LLC by investors, landlords, and other property owners, since the business structure features limited liability protection and tax benefits.
That being said, do you think that your property can benefit from the same legal structure in terms of liability protection and tax status options?
If you decide to follow through with the transfer, what necessary steps do you have to take to make the process legally binding?
Drawing from my experience as a business consultant, I have conducted thorough research and consulted legal professionals to provide you with the definitive steps required to transfer ownership of real estate to an LLC.
Quick Summary
- To transfer real estate to an LLC, you need to start by drafting a deed to transfer the property from your name to the LLC's name, ensuring it's signed in the presence of a notary public for legal binding.
- Forming an LLC for real estate offers benefits such as personal liability protection, tax advantages, and ownership flexibility.
- Approximately 20% of property transfers to an LLC encounter complications with 'due on sale' clauses in existing mortgages, potentially requiring the full repayment of the mortgage upon transfer.
- Transferring real estate to an LLC is a strategic move that provides asset protection and potential tax benefits, but I believe it's crucial to understand the implications on insurance policies and consult with experts for informed decision-making.
Process of Transferring Real Estate to LLC
In my early days of real estate investment, I found that transferring real estate to an LLC was more straightforward than I initially thought.
Here are seven steps to transfer property to an LLC:
1. Contact the Bank or Lender
Contact the bank or lender to start the process of transferring real estate to an LLC. 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.
2. Form an LLC
If you haven't already created an LLC, you must follow this step-by-step guide to starting 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.
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.
4. Obtain a Form for a Deed
A rental 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.
- Warranty Deed
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.
- Quitclaim Deed
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.
What Form Of Deed Should I Use To Transfer Real Estate To LLC?
What form of deed you should use to transfer real estate to an LLC will depend 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 rental property between unrelated parties since it is a safer alternative.
Depending on your State, you can prepare a transfer rental property deed yourself or hire an attorney or title company to help you.
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.
6. Sign and Record the Deed
Depending on your state, you, as the grantor, may be needed to sign the transfer rental 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 limited liability company.
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 limited liability company, it is important to get the advice of an attorney or law firm. Keep in mind that the process varies from state to state.
7. Change Your Lease
You should update legal documents, such as leases, to reflect that the LLC, not you personally, is now the rental property owner. Rent should be paid to the LLC and placed into its 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
Forming an LLC for your real estate can offer several advantages. Here's a glimpse:
Personal Liability Protection
Personal liability protection is usually the number one perk of forming an LLC. 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.
"A title company typically issues title insurance to protect the interests of the LLC."
- David Bitton, Co-Founder & CMO of DoorLoop, Best-Selling Author, Legal CLE speaker & Real Estate Investor
Tax Advantages
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.
Ownership Flexibility
When you hold real estate through an LLC organization, you can transfer ownership without having to record a deed and pay related charges.
This is especially useful for estate planning or when new investors join or depart a multi-member LLC.
Forming an LLC for real estate can offer up to 30% in tax savings for property owners, alongside personal liability protection and enhanced ownership flexibility, according to industry averages.
Insurance Considerations When Transferring Property to an LLC
Transferring real estate to an LLC is a strategic move often undertaken by real estate investors, landlords, and other property owners.
While the primary motivations might be asset protection, tax benefits, and liability shielding, it's crucial to understand the implications this transfer has on insurance policies.
Need for Different Types of Coverage
Commercial vs. Personal Policies: Once a property is under an LLC, it may be viewed as a business asset. This could necessitate a shift from a personal property insurance policy to a commercial one.
Liability Coverage: Given that the property is now associated with a business entity, there might be a need for enhanced liability coverage, especially if it's a rental or commercial property.
Specialized Coverage: Depending on the nature of the property and its use, there might be a need for specialized insurance coverages that weren't previously required.
Potential Changes in Premiums
Rate Adjustments: Transitioning a property to an LLC might lead to adjustments in insurance rates. Commercial properties often carry different risk profiles, which can influence premium costs.
Discount Opportunities: Some insurance providers might offer special rates or discounts for properties held under an LLC, especially if there are multiple properties insured under the same entity.
Ensuring Adequate Protection
Re-evaluation of Property Value: It's essential to ensure that the property's insured value is up-to-date. This might require periodic appraisals or assessments.
Understanding Exclusions and Limitations: Commercial policies might come with different sets of exclusions or limitations compared to personal ones. It's crucial to be aware of these to avoid gaps in coverage.
Consultation with Experts: Given the legal and financial complexities involved in transferring property to an LLC, consulting with insurance experts can provide clarity on the best coverage options.
Potential Challenges when Transferring Real Estate to LLC
Potential challenges when transferring real estate are still possible. This is what you can expect in terms of complications:
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 rental 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.
Related Articles:
- Why Buy Property Under an LLC
- Difference Between a Real Estate Trust and an LLC
- Should You Create an LLC for Your Rental Property
FAQs
How Much Is the Cost of Transferring Real Estate to an LLC?
It costs around $100 to transfer real estate to an LLC. The amount may vary depending on the state and other legal requirements.
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.
