Buying A House With An LLC, Explained
When you buy a home, having the title in your name provides tax benefits. But it’s also possible to form a limited liability company, or LLC, to buy the home instead of owning it yourself. This can offer homeowners certain protections, but it comes with trade-offs. Here’s a look at what an LLC is and how to buy a house with an LLC.
Key Takeaways:
- An LLC is a business structure that protects its owners from being held personally liable for the company’s debts and legal disputes.
- Buying an investment property with an LLC can limit your liability, protect your privacy, and offer tax benefits.
- Buying a house under an LLC makes less sense if you’re purchasing your primary residence because it typically is more expensive.
What Is A Limited Liability Company, Or LLC?
A limited liability company is a legal structure that protects its owners from personal liability for any debts or claims against the business. With an LLC, the owners and shareholders are not held personally liable for any losses related to the business. Most states allow single owners to own an LLC – so you can be the only member.
There are also tax advantages to owning an LLC because it is taxed on what is known as a pass-through basis. This means you’ll pay all taxes through each owner’s personal tax return. The primary benefit is that you’ll avoid getting taxed twice – once on the business level and then again on the individual level.
“LLCs are cheap and easy to set up,” says Doug Greene, owner and operator at Signature Properties in Philadelphia. “Anyone can do it for less than a couple hundred dollars, but you might want to hire a professional to properly set things up – especially since this is going to be the structure that holds a very expensive asset.”
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Can You Buy A House Under An LLC?
So, can an LLC buy a house?
“The simple answer is yes, you can buy a house and hold title in an LLC,” says Chris Gleason, founder and CEO of Simplicite Tax Loans in San Antonio, Texas. “However, you must consider whether the benefits of owning a home in an LLC might outweigh the potential drawbacks.”
Buying a house with an LLC can protect your privacy, limit your liability in the event of a legal dispute, and grant you tax benefits. However, the requirements to buy a house under an LLC differ from buying a home as an individual. It can be more challenging to find and more expensive to get financing when buying with an LLC.
“An LLC is a corporate entity, and it can close on one or many properties under the single LLC veil,” Greene says. “In addition to just owning a house under your own name, many people opt to buy property into a trust or LLC for extra protection. Usually, investors and landlords do this if they want to protect against liability or taxes or remain anonymous.”
If you buy a house with an LLC, Greene recommends creating and registering the LLC in the same state as the property you are buying.
“This is not a requirement, but it’s a best practice,” Greene says. “For one, it keeps things organized, and, secondly, it protects you – or the LLC – against localized laws and tax treatments. Although this is not a requirement, I highly recommend it.”
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Is It Possible To Transfer A Property You Already Own To An LLC?
Let’s say you bought your house under your own name, and then you later started an LLC and now want to transfer the ownership of your home to that LLC. It’s possible – but it also may trigger two different clauses listed in your mortgage: the due-on-sale clause and the mortgage acceleration clause:
- Due-on-sale clause: If you transfer or sell the home, you’ll have to fully repay the mortgage.
- Mortgage acceleration clause: You must repay the amount you borrowed in full – plus interest.
As a result, you’ll likely need to take out a new home loan to pay back the original mortgage. If interest rates are substantially higher than when you took out that loan, you could pay more in interest.
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When Should Someone Consider Buying A House With An LLC?
Buying a home with an LLC can be a helpful business strategy for experienced real estate investors who plan to buy multiple properties. For first-time home buyers or novice real estate investors, the downsides of buying a house with an LLC might outweigh the benefits.
“One important consideration is whether or not you plan to borrow for the purchase of the property,” Greene says. “As an individual, you can borrow through a regular conventional mortgage or similar structure, but when you’re set up as an entity like an LLC, you need to shop for different loans.”
Greene also says that buying a home with an LLC can affect the terms you’re offered on a mortgage.
“Corporate entities can still borrow, but in the eyes of a lender, they are viewed as a bit riskier and therefore have less favorable terms such as interest rates, down payments, mortgage insurance and additional points at closing,” Greene says. “They view LLCs as similar to businesses when they look to borrow money. On the contrary, when you buy a primary residence in your personal name, you get the best terms possible.”
“There are generally two main reasons that I see drive people to take title to a home in an LLC,” Gleason says. “First, they believe it will offer asset and liability protection, which may be true in some cases. Second, they believe it will help resolve complex ownership or estate issues. That also may be true in some cases.”
The average person or couple usually doesn’t need an LLC to deal with those issues, he says. “It’s far more common in commercial or investment transactions for an LLC to be used for those purposes, and with good reason,” Gleason says. “When it comes to your own home, you can generally solve the liability issues by purchasing liability or umbrella insurance. The ownership and estate issues can usually be solved by holding title in a well-structured trust.”
The Pros And Cons Of Buying A House Under An LLC
There are trade-offs to buying a house with an LLC. Let’s look at some of the perks and downsides of buying a home this way.
Pros
Some of the advantages of buying a home under an LLC include:
- Limited liability. As the owner of an LLC, you typically won’t be held personally liable for the company’s debts and liabilities. This can be especially attractive to real estate investors.
- Privacy. The LLC will be the name listed on the property’s public records, allowing you to protect your identity.
- Tax benefits. Buying a house with an LLC allows you to avoid double taxation because the LLC pays taxes on profits, but the owner does not.
- Makes it easier to buy a home with others. If you want to buy a house with a friend or another investor, an LLC can simplify the business arrangement.
- Keeps your business and personal life separate. Real estate investors may prefer being able to buy and sell property without it affecting their personal finances.
Cons
It’s also important to be aware of the downsides of buying a house with an LLC, including:
- More expensive. Setting up your LLC requires you to pay legal and permitting fees. Plus, lenders are more likely to charge an LLC a higher interest rate on a mortgage than they would an individual borrower.
- Potential difficulties in getting a mortgage. Lenders see lending to an LLC as riskier than lending to an individual, so you may have difficulty securing financing.
- Loss of the capital gains tax exemption. If you sell a house owned by an LLC, you’ll have to pay a capital gains tax on any profit. Individual homeowners don’t have to pay a tax on the first $250,000 of profit, but LLCs do.
- Loss of some property tax exemptions. Many states offer property tax exemptions or deductions if you own the home in your name and it is your primary residence. Homes owned by an LLC would be ineligible for these benefits. “Just by owning a home in an LLC, you can potentially lose a homestead or primary residence exemption for property tax assessment purposes,” Gleason says. “Depending on the state that you live in and how much your property is worth, that can lead to a significant increase in your property tax bill. Even if you occupy the property as your residence, you may not qualify for the exemption, all because of the LLC.”
Should You Buy Your House With An LLC?
According to Gleason and Greene, buying a home through an LLC makes more sense for real estate investors than average home buyers.
“Owning a home in your own name is a lot simpler, but you can own it in an LLC if there are special circumstances that warrant it,” Gleason says.
“You would be doing yourself a disservice by purchasing a home through an LLC and living in it as a primary resident,” Greene says. “My advice is that if you’re looking for extra protection on your personal residence, you should look to your home insurance plan and make sure you buy increased amounts of protection correctly for unforeseen events.”
FAQ
Here are answers to some frequently asked questions about buying a house with an LLC:
The Bottom Line
Buying a home with an LLC can be smart for real estate investors who plan to rent out the property and want to benefit from the protections that an LLC offers. Buying your primary residence with an LLC makes less sense because there are fewer advantages and higher costs.
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