I recently purchased an investment property. Although, I have an LLC set up, I bought the property under my name. However, I’m wondering is there a preferred way to purchase investment property - as indiv., LLC, S-corp. ? And what are the pros/cons of each. Also, if there is a benefit to having property in an LLC, is it too late to transfer the property to my LLC and receive those benefits?
Thanks in advance for all your help.
E
I am not sure of this answer but I have heard of people purchasing with an LLC b.c it is a personal entity and provides you with protection.
You can purchase under a LLC - just did it 3/29/05. If you purchased personally you can quit claim deed it to the LLC. If there is a loan on it tho the Lender might not like it.
KEC
You can transfer the property from yourself individually to your LLC. However, you will have to pay the real estate transfer tax again (the first time was when you purchased the property). In addition, if you used a lender who holds a mortgage, you may be required to refinance the loan (with associated settlement and loan costs) and have a new title insurance policy issued (paying another premium) etc. You also need to check with your lender regarding whether a personal guarantee of the mortgage will be required despite transferring (purchasing in the name of) the LLC.
If you try to use a quit claim deed and your lender finds out you may have problems. Transferring ownership from yourself individually to an LLC is literally transferring ownership. The LLC is not obligated on the Promissory Note and Mortgage you signed individually. There will in all probablility be language in the loan documents you signed individually giving the lender remedies. In addition, the title insurance insures the property for you indivdually - not the LLC. Therefore, if a title problem arises and you used a quit claim deed without obtaining title insurance, you may be unlucky.
One of the primary benefits of buying with an LLC is protection of your personal assets should something happen at the property owned by the LLC. For example, an accident occurs for which you do not have sufficient liability insurance - they will want to sell the property to pay the injured person. Another example might be if, for some reason, you (or the LLC which tecnically ownes the property) is unable to make payments on the mortgage. If the lender forecloses on the property you are using the LLC to limit your exposed assets to that single property and attempting to protect your personal assets and/or other investment properties from the creditor. It might be wise to form an LLC each time you purchase a property to prevent a domino effect should something go wrong at one property. The other properties, all being owned separately, are protected from problems at the problem property. This might seem expensive and time consuming but, in fact, it may be in inexpensive way to protect your assets if you intend to purchase more than one investment property.
As you can see, there are a lot of issues. If this is an investment property you intend to hold onto for a number of years, you might want to go through the trouble of selling the property from yourself to your LLC. I say that because that’s what you are really doing. If you intend to hold the property for only a short time period and “flip” it, it may not be worth the expense. Just be sure to use the LLC for future purchases and make sure you have adequate liabilty insurance and good tenants for the proprty.
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Buying in your name generally results in a MUCH cheaper interest rate than buying via any entity, especially for smaller investors or entities that lack a long & strong track record.
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Transferring the property from your name into the LLC generally allows the bank to call the loan and foreclose. As a practical matter, that rarely occurs in the present environment if the loan is current.
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Whether transfer taxes are due depends on your state’s specific rules. In most states, such transfers tend to be exempt from the transfer tax.
In short, transferring to an LLC is not normally a big deal. That may change when rates spike & banks have an incentive to call loans due - we’ll see!
John Hyre
How do you know if the bank will call the loan if you transfer – is that the kind of question you can ask them up front???
You never know for sure until it happens. You can ask up front, but getting an answer of any sort is rare.
John Hyre
I have a similar situation but wonder about whether or not I need to do a quit-claim to my new s-corp.
I bought the house last month in my own name, but just now got my s-corp papers back. There is another party in the corp who is contributing cash and I’m contributing the house and it’s equity.
One thing I’m concerned about is what I learned from J. Hyre’s book, that if I have the property in the s-corp I won’t have to pay self employment taxes on the whole profit, which will be about $40k when I sell in a few weeks.
Therefore, can I quit-claim it now to the s-corp and still get the tax benefit? (If not, then there’s obviously no need for me to pay the extra transfer taxes.)
Does it make sense to transfer property purchased in your name to a revocable trust and then make the beneficiary of the Trust an LLC? Will this allow the transfer of the property to an LLC without informing the lender of the transfer? The advice I hear is typically the same as expressed by John above. Usually the transfer to an LLC does not prompt a lender to call a note due. My concern is that if interest rates go up, they may call it down the road. Will the use of a trust help disguise the transfer? Is it worth it?
I have similar situation. I have two land properties in my name, which are paid off. What should I do to protect them and future properties without involving a lender?
Thanks,