Buying a House Under an LLC: Everything You Need to Know
Buying a house under an LLC offers benefits and drawbacks. Operating a business as an LLC limits the liability of the owners' personal assets and income.6 min read
Updated June 18, 2020:
Buying a house under an LLC offers many benefits and a few drawbacks. Operating a business as a limited liability company (LLC) limits the liability of the owners' personal assets and income. These owners are referred to as members. An LLC's structure provides advantages useful for a variety of reasons, from taxation to litigation and everything in between.
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. Most articles of organization do allow LLC members to purchase real estate, but this type of flexibility can pose problems, especially if a member buys a residential home for personal use. Still, there are a few reasons to consider purchasing or refinancing a home under an LLC instead of your own name, including:
- Separation of personal and business finances.
- Liability protection.
- Pass-through taxation.
An LLC should pay for real estate purchases using its own funds so that there's no confusion with regard to who owns the property. This is because confusion could arise if the LLC disbands and divides its assets, or if 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. Just be sure to document all financial transactions that take place between the entity and LLC members using your state's required forms.
Benefits to Buying a House Under an LLC
In some states, LLC members may transfer their real estate properties to the business in order to receive a tax exemption.
A newly established LLC may purchase property to use as part of its real estate portfolio, which can add value to the business and bolster its financial profile. An LLC may also earn income by leasing purchased real estate as residential or commercial spaces to tenants. As such, an LLC may exist solely to buy, rent, and sell real estate.
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 it practically impossible to find out where you live through public records. This is one reason celebrities and high-profile personalities purchase property under LLCs. Even if you're not a celebrity, however, you can still benefit from buying a house this way.
Since public records are easily searchable online, anyone can access your whereabouts in mere seconds. Just think how easy it would be for your friends, colleagues, employees, boss, or even strangers to learn how much you paid for your house. With an LLC real estate purchase, you wouldn't have to worry.
Buying real estate under an LLC also provides asset protection. If you're ever sued in connection with homeownership, owning it under the LLC will protect it. For instance, if someone falls and injures themselves on your property and they sue, you might get a judgment against you. Since you own the property under the LLC and not yourself, however, your assets are protected.
Before you purchase a home under your LLC, be sure to hire an attorney who specializes in LLCs 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 to purchasing property under an LLC exist, 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 also enjoy lower interest rates than LLCs. There are special tax breaks on a primary-residence mortgage, including the fact that the mortgage is tax deductible on your personal income. Individuals can also deduct mortgage insurance on FHA loans from their taxes. Neither of these tax breaks is available if the property is owned by an LLC. 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 that comes with owning a home through an LLC, so it's important to keep a clear line. 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. More old-school, traditional neighborhoods tend to not like the mixing of businesses and homeowners. Newer, up-and-coming communities, however, are more welcoming to these different financial structures.
Why Start an LLC for Real Estate?
Starting an LLC can be an intimidating task for even the most business savvy entrepreneur, so adding in the aspect of real estate can compound the intimidation factor. It doesn't have to be that way. The LLC structure offers many advantages, and, when you do your due diligence in following the rules and requirements within your state, starting an LLC can actually be quite straightforward.
If your business plan includes investing in real estate, creating an LLC to own properties is a great idea. Not every investor will want to go down this road, so it's ideal to have a thorough business plan laid out before deciding what type of business structure to run with. LLCs are great, 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 effort of the startup. Others don't. This depends on the cost of starting an LLC in your particular state and the annual requirements you'll need to keep up with. If the fees and requirements are more than you want to deal with, you might consider finding liability insurance instead.
Liability insurance, with its usual limits, exceptions, and so on, doesn't cover as many bases as the LLC business structure does. So, again, you need to know what your big plan is before you can decide on the right fit.
If you were to face a lawsuit, its possible that insurance coverage wouldn't totally protect you, but an LLC provides lots of protection. Real estate owners who plan to purchase and rent or sell multiple properties at a time, should really 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 does arise with one of your investments, the LLC itself 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.
How Pass-Through Taxation Works With LLCs
We've certainly covered the liability protection advantage of forming an LLC for the purpose of buying real estate, but the pass-through taxation aspect of LLCs is another important advantage. 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 that the company avoids the double taxation typical of corporations. The Internal Revenue Service (IRS) views LLCs as sole proprietorships or partnerships depending on how many members the business has. Sole proprietorships are categorized as disregarded entities, meaning that the profits and losses of the business pass through to its owner. Owners of pass-through entities pay personal taxes on the income of the company, 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 of the members is required to file a Schedule C or K Form or Form 1065 when they file their income taxes. This form reports any shares of profits or losses they got from the LLC that year. The LLC itself is still not subject to taxation.
Starting an LLC for real estate purposes is a popular option for modern entrepreneurs. Thanks to the many benefits including liability protection and taxation.
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