Thinking about buying an investment property in your own name? You may be making a huge mistake. One that could cost you tens — if not hundreds — of thousands of dollars.
Savvy investors know that buying a house through an LLC is smarter if you want to keep your business organized and limit your personal liability.
Success in real estate is like playing chess, where the goal is to protect the king at all costs. In this game, your personal assets, including your home, savings, and everything you own, are the king. Buying an investment property in your own name is like leaving the king wide open.
But is it even legal to use an LLC to buy a house? The answer is yes, and the process is likely simpler than you might think. In this guide, we'll show you how to buy an investment property with an LLC the smart way, so you can maximize tax savings and protect your personal assets.
What Is an LLC?
A limited liability company—or an LLC—is a type of business entity that can be used for various purposes, including buying real estate.
LLCs are popular tools among investors and small business owners because they offer flexibility and asset protection. They're easier to set up and manage than a corporation, but they offer added legal protections that you won't get when operating as an individual.
What Are the Benefits of Buying a Home With an LLC?
LLCs offer several key legal and tax benefits that make them particularly appealing to real estate investors. Here are a few of the major advantages of using an LLC for an investment property.
- Liability Protections: As its name implies, an LLC limits your liability, which means you can't be held personally accountable for anything related to your investment. So if someone sues your rental property, they can't come after your home or personal savings.
- Tax Flexibility: LLCs offer the option of pass-through taxation, which means the profits go directly to you without corporate taxes. That means you get the legal benefits of a business without the added accounting headaches.
- Added Privacy: When you buy a property through an LLC, your name will be kept out of public records. Instead of Jon Doe, your home will be owned by XYZ company. Even if you aren't doing anything suspicious, anonymity can save you from annoying solicitations and prevent your name and address from being available in public searches.
- Simple Transfers: Owning an LLC makes it easier to transfer ownership to someone else when it's time to sell or bring in partners. Instead of transferring the deed, you can simply transfer ownership of the LLC itself, which may save you time and money.
Is Using an LLC to Buy Property Legal?
Yes, buying a property with an LLC is legal in all 50 states. A business can purchase a home in the same manner as an individual. However, the LLC must be properly registered with the state to ensure the transaction is valid and the proper legal protections are in place.
Also, be aware that some HOAs and local laws place restrictions on LLC property ownership. So, always do the proper research to ensure you won't have any issues with a particular property you have your eye on.
How to Purchase a Home Under an LLC
Now that you understand the pros and cons of buying a house with an LLC, how do you actually do it? It's a fairly straightforward process, but you must complete the steps in the right order to prevent problems down the line. Here's a step-by-step look at how to put a property in an LLC:
- Register Your LLC: All you have to do to set up an LLC is to choose your business name, select the state you wish to file in, and fill out the necessary formation documents. You'll also be required to pay a filing fee to register the documents with the Secretary of State, which can range from about $35 to $500 depending on the state and the complexity of the filing.
- Get an EIN from the IRS: Once your LLC is formally established, you'll want to get an employer identification number — or EIN — from the IRS. An EIN is the equivalent of a social security number for a business, and it will allow you to separate your business activity from your personal finances.
- Set Up a Business Bank Account: You can use your EIN to set up a business bank account to separate any income and expenses related to the investment property from your personal accounts. Never mix business and personal finances. Commingling funds will not only complicate your bookkeeping; it can also put your personal assets at risk if you’re ever sued.
- Create an Operating Agreement: Although not required by every state, it may be wise to create an operating agreement, especially if the LLC has multiple owners. It's a contract that outlines how the company will be managed and lays out the ownership shares, responsibilities of all parties involved, and what happens if someone leaves. An operating agreement can be crucial for avoiding disputes and putting any verbal agreements in writing.
- Purchase the Property With an LLC: Finally, purchase the property under the LLC instead of using your name. The title company may request additional documentation to verify the LLC was properly registered and in good standing. However, making the purchase under the LLC (rather than in your own name) will help you avoid legal and financing issues down the line.
How to Transfer a Property to an LLC
Say you want to take a property you own and transfer it to an LLC. While that is perfectly legal, you need to be careful. If you still have a mortgage on the home, transferring it to an LLC may trigger a due-on-sale clause. That means the lender may call the loan due immediately, and you'll be on the hook to pay the remaining balance. So, always check with them before initiating the transfer.
Can You Get a Mortgage Under an LLC?
Understanding the logistics of using an LLC to buy a property is great, but what about financing? Can an LLC get a mortgage?
Unfortunately, most traditional mortgage lenders won't allow you to buy a property using an LLC. It's too risky because the liability protections make it harder to take action if you default on the loan.
Your best financing options are typically commercial loans and portfolio lenders. Be aware that these loans often require higher down payments—typically 20-30%. They also tend to feature shorter loan terms—usually 5 to 20 years, as opposed to 30. You may also be required to give a personal guarantee, which can limit your liability protection.
What Are the Tax Benefits of an LLC for Real Estate?
It's a common misconception that buying a property through an LLC automatically lowers your taxes, which isn't the case. The truth is, the IRS will still tax your rental income the same way they would if you owned the property in your own name. So, simply owning the LLC doesn't save you any money.
Although it doesn't hurt either and you can still write off expenses like mortgage interest, depreciation, and business expenses. It gives you more control over your expenses and can simplify your accounting by separating your personal income from your business. Ultimately, the real benefit of an LLC is liability protection. So if your main goal is tax savings, an LLC isn't going to automatically give you that.
How Buying Real Estate With an LLC Protects You From Lawsuits
However, buying a property under an LLC does give you legal protections that shield you from lawsuits, which is the real reason to use one. If a tenant ever sues, they can only go after assets owned by the LLC, not your personal savings.
Although there's one big mistake that can destroy that protection, even with an LLC — it's called "piercing the corporate veil". The court can still ignore your LLC and hold you personally accountable if you're caught mixing personal and business funds.
To avoid piercing the corporate veil, make sure to:
- Keep separate financial records.
- Use a dedicated LLC bank account for all business transactions.
- Maintain proper LLC formalities like meeting minutes and legal documentation.
All of those documents can be shown to the court as proof that you weren’t mixing funds, ensuring your personal assets are still protected.
Understanding the pros and cons of buying a property under an LLC is one thing. But finding the right Property and qualifying tenants is a whole other ball game. Fortunately, Undivided can help.
