Buying a House With an LLC: Pros & Cons

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Buying a house with an LLC has many benefits for real estate investors. When the limited liability company owns the property, you can access tax benefits and asset protection. You may also find it easier to partner with other investors. However, setting up an LLC can be complicated, and you may struggle to secure a mortgage loan.

Are you a first-time real estate investor looking to buy your first investment property? Or do you already own multiple properties and wonder if you should transfer property ownership to an LLC? If so, this article is for you.

From setting up an LLC and managing legal and financial considerations, this article will guide you through the process of buying a house with an LLC. You will also learn about the pros and cons of owning an LLC.

What Is an LLC?

An LLC—or Limited Liability Company—is a legal business structure that protects its owners from personal liability. The LLC structure combines the tax benefits of a sole proprietorship or partnership with the liability protection of a corporation. An individual or multiple people can own an LLC, and there are no restrictions on the types of businesses that can be formed as an LLC.

State laws regulate LLC structures. However, an LLC offers plenty of flexibility for investment property owners. This includes tax benefits, the number of LLC members, and the types of properties you can own. However, it’s good to note that the LLC structure has some property ownership limitations. For example, you cannot live in the home bought under the LLC.

For most property investors, the LLC structure provides the best flexibility and protection when dealing with multiple properties. However, consulting with a real estate tax professional is vital to guide you through local regulations affecting LLC owners.

How To Buy a House With an LLC

An LLC can buy and own a home or any other property type. You can use an LLC to buy rental, fix-and-flip, or commercial properties. Buying a rental property or other real estate investment property with an LLC protects your assets in case of a lawsuit. Although filing as an LLC is not complicated, more paperwork is involved than a standard house sale.

Here are the five steps to buying a house with an LLC.

1. Create an LLC

The first step when buying a house with an LLC is to file the necessary documentation. Because state laws regulate the LLC structure, you should consult a real estate attorney specializing in LLCs. It’s also good to note the registration process can take seven to 10 days.

Here is a list of the documents typically required to create an LLC:

• IRS Form SS-4
• Name reservation application
• Articles of organization
• The operating agreement that outlines the ownership structure
• Business licenses
• Employee Identification Number (EIN)

You must register with the Department of Revenue and Taxation in many states for one or more tax types. However, in all cases, you should check which documents are necessary to operate an LLC to run a real estate business.

After registering your LLC, you can open a bank account and look for an investment property.

2. Find a suitable property

Once your legal entity is established, you can start house hunting. In this respect, there is no difference when buying a house with an LLC as if you were a private individual. You must determine a suitable location, conduct market research, and perform due diligence. The only difference is that you make an offer in the name of the LLC.

3. Obtain financing 

The next step when buying a house with an LLC is to arrange financing. Unfortunately, money lenders are more wary about approving a mortgage loan to an LLC owner than a private individual. Also, because your LLC has no credit history, you may have to pay higher interest rates. Therefore you should ensure all your paperwork is in order before applying for a home loan.

Here are a few caveats when applying for a mortgage to buy a house with an LLC:

• You must apply for a commercial loan.
• You cannot take out conventional loans sold to Freddie Mac, Fannie Mae, FHA, or traditional residential mortgages.
• It makes sense to get a pre-approval letter for a commercial loan.

4. Make an offer

After deciding on the house to buy with an LLC, you can put in an offer. The process is similar to the regular method of buying a house—the only difference is that the offer is in the LLC’s name. Additionally, all transactions will be made from the LLC.

The purchase agreement should contain the usual contingencies based on the final loan approval, home inspections, property liens, and appraisals.

It’s good to note that mortgage approval may take longer through the LLC than for a private individual.

5. Close on the property

If everything is in order after title searches, inspections, and appraisals, it’s time to close the deal on the house. This step involves finalizing the purchase so that the LLC becomes the property’s new owner. You transfer money from the LLC bank account to the seller’s account and sign all relevant documents.

Depending on the number of LLC business partners and business structure, one or more parties may have to sign the documents.

Pros of Buying a House With an LLC

The two main advantages when buying a house with an LLC are limited liability protection and legal protection for your assets. These protections mean that you cannot be held personally liable for anything that happens at the property. Additionally, creditors cannot go after your personal assets if the LLC goes bankrupt or defaults on mortgage payments.

However, buying a house with an LLC has many more benefits for investors.

Increased privacy

The LLC structure means that public records show the property belongs to the LLC. Public records do not show your personal details. Therefore, the LLC allows you to separate your personal life from your business dealings. In certain cases, this is beneficial if you don’t want your ownership to become public knowledge.

Tax benefits

Tax breaks and dedication are among the biggest advantages an LLC offers to property investors.

For example, LLCs have a pass-through tax structure where the LLC pays taxes on profits. Also, The LLC doesn’t pay federal income tax. Instead, the business owner only pays taxes on the share of profits they receive. Therefore, it eliminates double taxation, where you are taxed at a personal level and business level.

Limited liability protection

Buying a house with an LLC means avoiding potential lawsuits as a business owner. For example, you have protection against liability for debts or being sued because of someone injuring themselves on the property. Because the LLC is the owner, only assets owned by the corporation are at risk, not your personal possessions.

Asset protection

When you buy a house with an LLC, you protect your personal assets and those of the other LLC members. This benefit can be especially useful if you work in a profession or run a business with a greater risk of lawsuits or claims. You do not have to fear losing your primary home, vehicle, or other assets to settle a claim on the LLC property.

Ownership flexibility

One of the benefits of an LLC is to allow multiple members to share ownership. For example, you can attract more real estate entrepreneurs to your enterprise. These can include corporations, individuals, and other foreign entities. Also, most states allow for “single-member” LLCs. Therefore, there are many options for owning property through an LLC.

Estate planning

One of the best pros of buying a house with an LLC is estate planning. For example, it’s possible to transfer property ownership by increasing the share of individual LLC members—such as family members. Additionally, you could include a clause in the operating agreement outlining that the property should be passed to your children.

Therefore, transferring a house to an LLC can mean minimizing estate and gift taxes.

Cons of Buying a House With an LLC

Buying a house with an LLC may not be the ideal option for everyone. The cost of setting up the LLC, increased mortgage costs, and a lack of capital gains tax benefits can be a disadvantage for some investors. Let’s look at some of these disadvantages in more detail.

LLC maintenance costs

Setting up and maintaining an LLC incurs extra costs in legal fees. First, you must pay registration fees. Depending on your state, these can range between $50 and $500. Additionally, you have to pay annual fees. These can include the following:

• Annual LLC taxes
• Annual report fees
• Registered agent fees
• Business license renewal fees
• Business permit fees

Depending on local state laws, LLC owners may pay around $1,000 in fees annually.

Limited finance options

Financing a real estate purchase is tricker for LLC owners. There are two basic issues. First, mortgage options are limited. Second, financing costs are higher.

Applying for a mortgage through an LLC means you cannot apply for FHA loans, Freddie Mac, Fannie Mae, or other conventional loans. Additionally, mortgage lenders may have more stringent requirements. This is because of the liability protection LLCs offer.

Buying a house with an LLC costs more

Due to the risks involved, lenders usually charge more to finance property investments. Because the property isn’t your primary residence, money lenders realize that the income property will be low on priorities if you face financial hardship. Therefore, they charge more for their services.

Additional costs associated with getting a commercial loan can include the following:

• Higher down payment
• Higher interest rates
• Personal guarantee on the loan

Sometimes, it’s easier to arrange financing to buy a house with an LLC through private or asset-based lenders.

No capital gains tax exemption

When selling a real estate investment, you lose the capital gains exemption. Typically, homeowners who sell their primary residence are exempt from capital gains for the first $250,000 of profit ($500,000 if married). However, that doesn’t apply if the LLC bought the home. Therefore, the LLC must pay capital gains tax on 100% of the profit.

Other Restrictions When Buying a House with an LLC

Due to the LLC business structure, you cannot live in a property you bought with a corporate entity. To do so would mean “piercing the corporate veil.” For example, you could become liable for corporate damages and put your personal assets at risk. Therefore, the house must stay separate from your personal use.

You can transfer your current home to an existing LLC. However, you may be liable for hefty fees unless the mortgage is paid off. For example, transferring property to an LLC could trigger mortgage acceleration and due-on-sale clauses. This could result in having to apply for another mortgage.

Other Business Structures for Real Estate Investors

Buying a house with an LLC has definite advantages over a sole proprietorship. The LLC gives you liability protection, protecting your personal assets and limiting your legal liability. Depending on your financial goals and circumstances, other business structures to buy an investment house could be advantageous.

Here is a brief explanation of corporate entities you can use to buy a house.

• S-corporation: Also known as S-Corp, this type of corporation has several tax perks. The profits are passed on to individual members who file them on their tax returns. Investors can deduct expenses like property taxes and depreciation. However, more stringent restrictions on S-corps make them less desirable than an LLC for owning property.
• C-corporation: A C-Corp has some tax benefits for property investors. However, you pay more capital gains tax than you would with an LLC. Additionally, your personal assets could be at risk in the event of a lawsuit.

Extra taxes are another reason why a C- or S-corporation is not advised for real estate investors. The property is subject to taxes when transferring out of the corporation. However, with an LLC or Limited Partnership (LP), no taxes are imposed on such transfers. Also, you will find that having an LLC or LP is more beneficial during refinancing.

Should You Use an LLC to Buy a House?

Using an LLC to buy a house can benefit many investors; however, it may not be for everyone.

The LLC corporate structure means that you enjoy liability and legal protection. It also helps you separate personal finances and taxes from the business entity. However, additional costs and limitations exist before setting up an LLC to run a real estate business.

Buying real estate in your own name may be more advantageous if you are a first-time investor. Doing this limits your initial costs, and there are fewer legal and financial hurdles to jump. However, as your portfolio grows and you gain experience, buying rental properties with an LLC is the best option to protect your assets and investments.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.