Putting property in an LLC is a common strategy for new businesses, landlords, and real estate investors. It's not a difficult process, but it's important to document the transaction and consider the tax consequences.
You might put property into an LLC for two main reasons:
- To capitalize your business.A new business needs assets to get off the ground, and owners typically make capital contributions that might consist of cash, personal property, or real estate. In exchange, the owners get equity in the business.
- For liability protection when you own investment real estate.An LLC helps shield property owners' personal assets if a lawsuit or debt collection action involves their rental or investment property.
Transferring cash and personal property to an LLC
If you're starting a new business, you'll probably put some of your own money into it. You may also transfer personal property like office equipment, tools, or vehicles to the business.
But transferring property to the business isn't as simple as moving money around or taking your printer to your new office. To avoid tax problems and keep your company books in good order, you need to properly document the transaction. Follow these steps:
- Research the fair market value of anything you're transferring to the company.
- If you are transferring personal assets in exchange for a stake in the company, record the asset, purchase price, fair market value, and depreciation in yourLLC operating agreement.
- If the company is buying the assets from you for cash, record the transaction in your accounting records.
- For titled assets like vehicles, make sure titles are properly transferred. If there's a vehicle loan, be aware that you may need lender approval before making any transfers.
If you're not familiar with business accounting, it's a good idea to have an accountant or business lawyer help you properly document asset transfers and startup costs.
Transferring real estate to an LLC
First, you'll need toform an LLCby filing articles of organization with your state's business formation agency, in addition to any other applicable requirements.
If there's a mortgage on the property, contact your lender to find out aboutrestrictions on transfersand get approval for a transfer to your LLC. It's important to realize that transferring property to an LLC does not relieve you of personal responsibility for paying the mortgage.
Next, get a form for a warranty or quitclaim deed that's valid in your state, or have a lawyer prepare a deed for you. When you buy real estate from someone else, you'll usually get a warranty deed that guarantees the title to the property is good. But many people use a quitclaim deed to transfer property to their LLC. A quitclaim deed simply says that you're passing whatever interest you own in the property to the LLC.
A deed must be signed, and it may need to be witnessed or notarized to be valid, depending on your state. After it's signed, take it to the city or county agency that handles real estate records so it can be recorded.
Once the transaction is complete, you can amend your lease to say that the LLC is now the landlord. Be sure to establish a bank account for the LLC and handle all income and expenses on your rental property through the LLC account.
Should I put my property in an LLC?
Several factors determine whether you should put your rental property in an LLC, including the impact on your taxes, potential liability exposure, and your lender's willingness to approve a transfer.
However, it's not generally recommended that someone put their house in an LLC. While you can put your personal residence under an LLC, that can have unpleasant tax consequences, including losing homestead tax exemptions and the capital gains tax exclusion when you sell.
You can put property under an LLC by following good accounting practices and completing and filing a few forms. But transfers to an LLC can have ripple effects, so it's best tosort through the pros and conswith a lawyer or accountant before you get started.
Find out more about Starting Your LLC
FAQs
Potential drawbacks include formation/ongoing costs, mortgage difficulties, and limited liability protection.
Why do people put their house under an LLC? ›
“In my opinion, LLCs are your best option for owning real property, as they blend the best aspects of partnerships and corporations. With an LLC, you don't own the property, the company owns it, protecting you from much liability.”
What are the advantages of putting a rental property in an LLC? ›
Benefits of Forming a California LLC for Rental Property
- Separation of Personal Assets from Real Estate Holdings. ...
- Liability Limitation. ...
- Protections Against Liens Against Identically Titled Properties. ...
- Personal Liability Protection Among Members. ...
- Trusts Generally Do Not Provide Asset Protection or Limited Liability.
Your LLC can pay the mortgage on properties owned by the LLC, as these are legitimate business expenses.
What are the risks of an LLC? ›
The Top 10 Disadvantages of LLC are listed below.
- Limited liability has limits.
- Self-employment tax.
- Consequences of member turnover.
- Personal liability protection.
- Corporate taxes are usually bypassed.
- Difficult to transfer ownership.
- Self-Employment Taxes.
- Confusion About Roles.
Both single member and multimember LLCs offer the benefits of “pass-through” taxation of profits and losses, limited liability and personal protection for the owners. The key drawback to an LLC is costs: legal fees, insurance and mortgages.
Why do rich people buy houses under LLC? ›
Privacy: If you own a real estate investment business, having an LLC is beneficial to you because it allows you to separate your personal life from your business. Instead of your name and info on the paperwork, it's the LLCs. Tax benefits: LLCs remove the possibility of double taxation.
Why do celebrities buy houses under LLC? ›
An LLC owns the real estate assets listed under its name, which always appears on public records. The anonymity of members is one reason why high net-worth individuals and celebrities form LLCs to buy or sell real estate.
Should I create a trust or LLC first? ›
The choice between LLC and trust depends on individual situations. LLCs are better at protecting business assets from creditors and legal liability. Trusts can handle many types of assets and are better at avoiding probate and reducing estate taxes.
What type of business is best for rental properties? ›
LLCs are the best standard business type for rental properties. However, other business structures may be better depending on your unique needs. These structures include C corporations and S corporations, which offer different tax structures.
LLCs can have an unlimited number of members; S corps can have no more than 100 shareholders (owners). Non-U.S. citizens/residents can be members of LLCs; S corps may not have non-U.S. citizens/residents as shareholders. S corporations cannot be owned by corporations, LLCs, partnerships or many trusts.
What is the difference between a sole proprietorship and an LLC? ›
There are important differences between LLCs and sole proprietorships. The most significant difference is whether you have limited liability for the business' debts and obligations, as with an LLC, or whether the business' liabilities and obligations fall to you personally in the event of a lawsuit or debt collection.
What if your LLC makes no money? ›
All corporations are required to file a corporate tax return, even if they do not have any income. If an LLC has elected to be treated as a corporation for tax purposes, it must file a federal income tax return even if the LLC did not engage in any business during the year.
Can an LLC write off a home purchase? ›
A property/house is not considered an expense, it's an asset, so you don't deduct the purchase price. The expenses that you deduct would be the cost to upgrade/repair, interest (if financing), cost to buy/sell (realtor fees), depreciation, etc. You are taxed on your net profit from the sale.
Should I pay myself a salary from my LLC? ›
First, you should know that you're not required to take a salary from an LLC. While this may not work for everyone, it's still good to know you have the option. This decision might be best for you if you want to keep the money in the business, or if the company isn't generating enough revenue to pay you.
Are there any downsides to creating an LLC? ›
Disadvantages of creating an LLC
Cost: An LLC usually costs more to form and maintain than a sole proprietorship or general partnership. States charge an initial formation fee.
What are the pros and cons of LLC ownership? ›
LLCs offer several benefits over sole proprietorships and partnerships, such as limited liability and tax efficiency, but come with the drawbacks of potential self-employment taxes and complexities in management and ownership transfer.
Which of the following is a disadvantage of an LLC? ›
A major disadvantage of an LLC is that owners may pay more taxes. When setting up as a pass-through to owners, they are subject to self-employment tax.
What are the tax benefits of an investment LLC? ›
Tax Benefits
Investment LLCs are taxed as pass-through entities by default, but they are also flexible in their tax classifications and can be taxed as corporations. Pass-through taxation means the LLC's losses and profits are passed through to the LLC's members and reported on individual tax returns.
