Key Takeaways

  • LLCs are flexible entities that can purchase real estate, separating personal and business finances.

  • The main advantages of purchasing real estate under an LLC are personal liability protection, privacy (since the property would be titled in the LLC's name), and potential tax advantages with asset appreciation.

  • Downsides include limited financing options since FHA loans and certain tax deductions aren’t available to LLCs, and LLCs may face higher interest rates and resistance from residential co-op boards.

  • An LLC trust combines LLC and trust benefits, offering added asset protection and facilitating estate planning.

  • LLCs receive pass-through taxation, which taxes income at the individual level, avoiding corporate tax obligations.

  • Setting up an LLC for real estate requires selecting a name, filing articles of organization, obtaining an EIN, drafting an operating agreement, and maintaining separate business finances.

  • Post a job on UpCounsel to find an LLC formation lawyer in your state. 

 

If you’re wondering how to buy a house under an LLC or if a business can buy a residential property, you will find the answers you’re looking for in this article.
 

Here, we will also discuss the process and benefits of buying a house under an LLC, potential drawbacks, and the importance of working with an LLC formation lawyer to ensure you make the right decisions. 


 

What Is an LLC, and Can It Buy a House?

There are many types of business entities, such as sole proprietorship, partnership, corporation, and LLC. An LLC is a business entity with its own assets and income. 
 

As such, it can purchase real estate, including a house or business premises, for any reason outlined in its articles of organization. 
 

An LLC provides excellent flexibility in taxation, ownership, and management. Additionally, there are no restrictions on the number of members you can have with an LLC.
 

Most articles of organization allow LLC members to purchase real estate. However, this article will show that this flexibility can pose challenges, especially if a member buys a residential home for personal use. 
 

Those who consider purchasing or refinancing a home using an LLC instead of their name tend to do so for one of these reasons and the benefits that come with them:
 

  • Separation of personal and business finances

  • Liability protection

  • Pass-through taxation


 

Benefits of Buying a House Under an LLC

There are certain benefits of buying a house under an LLC that make this a particularly appealing option for some:

 

  1. In some states, LLC members may transfer their real estate properties to the business to receive a tax exemption.
     

  2. A newly established LLC may purchase property as part of its real estate portfolio, adding value to the business and bolstering its financial profile. 
     

An LLC may also earn income by leasing purchased real estate to tenants as residential or commercial spaces. As such, an LLC may exist solely to buy, rent, and sell real estate.
 

  1. Another key benefit of buying a house under an LLC is privacy. It's difficult for someone to figure out how much you paid for a property unless they know the name of your LLC. 
     

Buying a house under a business makes finding out where you live through public records practically impossible. This is one reason celebrities and high-profile personalities purchase property under LLCs. 
 

Even if you're not a celebrity, you can still benefit from buying a house this way.
 

  1. Since public records are easily searchable online, anyone can access your whereabouts in seconds. 
     

Just think how easy it would be for your friends, colleagues, employees, boss, or strangers to learn how much you paid for your house. 
 

  1. With an LLC real estate purchase, this information can remain private.


 Buying real estate under an LLC also protects assets (see our page about LLCs for real estate agents). If you are sued for homeownership, owning it under the LLC will protect you.  

For instance, if someone falls and injures themselves on your property and they sue, you might get a judgment against you. 
 

Your assets are protected because you own the property under the LLC and not yourself.
 

Before you purchase a home under your LLC, hire an LLC lawyer to ensure your articles of organization are properly filed. You can also avoid conflicts by getting feedback from other LLC members before making a real estate purchase or transfer.


 

Drawbacks of Buying Property Under an LLC

While many advantages exist to purchasing property under an LLC, there are also drawbacks. 
 

Access to financing is the main one since many prospective homeowners need programs such as FHA loans to qualify for a mortgage. FHA loans require a smaller down payment on a property, but they are only offered to individuals, not companies.
 

Individuals may also receive lower interest rates than LLCs. There are special tax breaks on a primary-residence mortgage, including the fact the mortgage is tax deductible on your personal income. 
 

Individuals can also deduct mortgage insurance on FHA loans from their taxes. However, if an LLC owns the property, neither of these tax breaks is available. 
 

Even in single-member LLCs and other pass-through entities, real estate tax breaks are minimized because investors cannot leverage as much.
 

It's also easier to mix business with personal affairs when you've purchased your own home under your LLC, even if you try to run the two separately with different bank accounts, email addresses, and credit cards. 
 

It can be tempting to abuse the flexibility of owning a home through an LLC, so keeping a clear line is important. Without a corporate veil to worry about, LLC owners can easily become relaxed in places they shouldn't.
 

Certain co-op boards in apartment complexes are not fans of the idea of a company, rather than an individual human being, owning a condo in their building. But the kinds of attitudes you'll encounter depend on where you're looking to purchase. 
 

Old-school, traditional neighborhoods tend not to like the mixing of businesses and homeowners. Newer, up-and-coming communities, however, are more welcoming of these different financial structures.


 

How to Buy a House Through Your Business

Before looking for portfolio lenders, register in your state’s Department of Labor and Licensing. Lenders may ask for a record of your LLC’s operating agreement when you apply for a rental property LLC mortgage. 
 

An operating agreement sets the rules and regulations, share of ownership, and member responsibilities. Portfolio lenders may offer better rates if you own rental properties, as it shows you are a real estate investor. 
 

Ownership of a real estate business will show that you are a low-risk borrower, which will reassure customers of your business.
 

An LLC should pay for real estate purchases using its own funds to avoid confusion about who owns the property. Confusion could arise if the LLC disbands and divides its assets or the company is sued. 
 

However, LLC members may lend their own money to the LLC to purchase a property.
 

The LLC can apply for bank mortgages, which are approved depending on the business's credit rating and debts. Establish creditworthiness before reaching out to mortgage lenders. 
 

Document all financial transactions between the entity and LLC members using your state's required forms.


 

Should You Start an LLC to Buy a Residential Property?

Starting an LLC can be intimidating for even the most business-savvy entrepreneur, and adding real estate can compound the intimidation factor. 
 

It doesn't have to be that way. 
 

The LLC structure offers many advantages, and starting one can actually be quite straightforward if you do your due diligence and follow the rules and requirements within your state.
 

Creating an LLC to own properties could be great if your business plan includes investing in real estate. 
 

Not every investor will want to pursue this option, so having a thorough business plan is ideal before deciding on a business structure. 
 

LLCs have advantages, but they don't work perfectly for everyone.
 

Some investors find the coverage for potential lawsuits created by the LLC's inherent liability protection is worth the startup's effort. Others don't. 
 

This depends on the cost of starting an LLC in your particular state and the annual requirements you'll need to meet. 
 

If the fees and requirements are feasible, you might consider purchasing liability insurance.
 

Liability insurance, with its usual limits, exceptions, and so on, doesn't cover as many bases as the LLC business structure. So, again, you need to know your big plan before you can decide on the right fit.
 

If you were to face a lawsuit, it's possible that insurance coverage wouldn't completely protect you, but an LLC provides extra protection. As such, real estate owners planning to purchase, rent, or sell multiple properties at a time should consider operating under an LLC. 
 

With multiple sales and leases happening, there's plenty of potential for lawsuits, so you may find the work of an LLC startup worth the effort.
 

All real estate investors own personal property as well. Creating an LLC for your real estate investments keeps your personal assets nice and safe. This way, you can do your job and even expand your business with less worry. 
 

If a lawsuit arises with one of your investments, the LLC is involved and liable, but its owners or members are not held personally responsible. The LLC's assets would be at risk, but the owner's personal property would not.


 

LLC Trusts: How They Work and Why They Matter

An LLC trust combines the asset-protection benefits of a trust with the flexibility and operations of an LLC for a powerful estate-planning and asset-protection tool. 
 

Together, an LLC and a trust create a flexible structure for an investor to simultaneously achieve asset protection and succession planning, especially for residential use.
 

Property owners have extra protection from personal liability, and their assets are out of probate to facilitate ownership.
 

This option is attractive for anyone trying to minimize legal risk exposure and create a straightforward estate plan. An LLC trust provides a dual-structured, robust approach to purchasing property.


 

How Pass-Through Taxation Works With LLCs

Some view the taxation benefits of LLCs as the primary reason for starting an LLC to invest in real estate.
 

Pass-through taxation with LLCs means the company avoids the double taxation typical of corporations. 
 

The Internal Revenue Service views LLCs as sole proprietorships or partnerships, depending on the business's number of members. Sole proprietorships are disregarded entities, meaning the business's profits and losses pass through to its owner. 
 

Owners of pass-through entities pay personal taxes on the company's income, but the company itself isn't responsible for taxes.
 

LLCs are ideal because they allow for this pass-through taxation typical of sole proprietorships but provide liability coverage that sole proprietorships don't. 
 

When a business owner manages properties through an LLC, the appreciation in value of the properties and the income from renters aren't susceptible to tax penalties.
 

Multi-member LLCs also enjoy pass-through taxation, but each member must file a Schedule C, Schedule K-1, or Form 1065 when they file their income taxes. 
 

This form reports any shares of profits or losses they received from the LLC that year. The LLC itself is still not subject to taxation.


 

Steps to Set Up an LLC for Real Estate

Setting up an LLC for real estate purposes involves a straightforward series of steps to legally establish your business and protect your assets.
 

These steps are:

  1. Choose a Business Name

Choose a distinctive business name that meets the naming requirements of your state. The name should include ‘LLC’ or ‘Limited Liability Company;’ you cannot use restricted words unless you have special permission.

  1. File Articles of Organization

File the articles of organization with the appropriate office in your state, generally the Secretary of State. 
 

The articles of organization contain basic information about your LLC: your business name, address, and purpose. The filing fee varies by state, so check local requirements.

  1. Obtain an Employer Identification Number (EIN)

You’ll need an EIN, a unique number issued to you by the IRS, to open a business bank account, pay employees, and file taxes. You can apply for an EIN through the IRS; the process is usually quick and free.

  1. Draft an Operating Agreement

This document describes how the LLC will be managed, what each member will do, and how disputes will be resolved. 
 

Although not every state requires an operating agreement, having one, especially a thorough, well-drawn one, is crucial for multiple-member LLCs to set expectations and help protect you if things don’t go as planned.

  1. Open a Separate Bank Account for the LLC

To protect liability, separate your business finances from your personal finances. Using a dedicated business account tells the world that your LLC is a separate legal entity.

  1. Obtain Necessary Permits or Licenses

Depending on what kinds of real estate activities you’re planning, you might need a state or local permit or license, so be sure to check whether you comply with the applicable regulations.

  1. Consider Working with a Lawyer

Every state has specific laws about the formation of real estate LLCs, and an LLC formation lawyer in your state can ensure your LLC is formed and documented under all applicable laws. Failure to do so can be expensive.


 

Conclusion

Starting an LLC for real estate purposes is a popular option for modern entrepreneurs thanks to the many benefits, including liability protection and taxation.
 

If you need help buying a house under an LLC, post a job on UpCounsel's marketplace. 
 

UpCounsel accepts only the top 5% of lawyers on its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience. They work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.