Buying A House With An LLC: Everything You Need to Know
When it comes to buying a home, many people consider using an LLC. An LLC, or limited liability company, is a legal formation used in local taxation for liability and tax reasons, and the laws governing these LLCs make it sometimes useful to have a home listed under it.3 min read
When it comes to buying a home, many people consider using an LLC. An LLC, or limited liability company, is a legal formation used in local taxation for liability and tax reasons, and the laws governing these LLCs make it sometimes useful to have a home listed under it. If you would like to consider using an LLC to buy some real estate, whether using an existing LLC you are a part of or forming one for this purpose, there are a lot of things to consider.
What Is an LLC?
LLCs are companies that, for the purposes of local governance and certain legal transactions, are treated as having some of the properties of a business with a sole proprietor or partnership and some of the properties of a corporation. Basically, an LLC has a tax structure in which profits are treated as “pass through” income, taxed as personal income by the person or persons who own the LLC. At the same time, the liability of the LLC is treated more like a corporation, with legal vulnerability mostly limited to the assets owned by the company instead of being assessed against the property and capital of the owners.
It's also important to realize that an LLC is only recognized as such on the local level; for federal purposes, the designation is meaningless. Filing your LLC as a corporation, which is possible in some areas, can allow you to file taxes as an S corporation, a federal status that acts similarly to an LLC but for federal purposes. S corporations allow income to “pass through” for federal purposes much as an LLC does for local taxes but require owners to organize as a corporation and follow stringent ownership and activity guidelines. If you are just putting together an LLC to buy the property, this is likely more complication than you need.
Buying Homes With LLCs
There is one major impediment to buying a home through an LLC: the bank. Banks are nervous about giving large sums of money to a new LLC because the liability-limiting properties of the company could shield it from legal penalties involved in defaulting on the mortgage loan. One trick to circumvent this is to get a mortgage for the home in your own name, and then transfer the property to the LLC. You will still be personally liable for the amount of the mortgage, thus keeping the bank from dealing with unsecured money, but the liability-protecting properties of the LLC will hold over the property itself.
Although filing as an LLC is easier than many would guess, it does still involve some work. So why do people do it? There are several important benefits to owning property via an LLC.
- LLCs maintain privacy, as the listing in public records will refer to the company and not the owners. Since those involved in the LLC are usually not listed in these documents, this helps in situations in which it could be embarrassing or damaging for the ownership to be public knowledge, such as a celebrity buying a home.
- Protection in the case of a lawsuit. While no one likes to think about one's guests coming to harm, if a visitor is hurt on privately owned property, they are usually able to assess damages against the entirety of the owner's possessions. If the owner is an LLC, however, the actual owners behind the LLC are shielded; only the assets of the LLC itself are at stake.
- Avoiding double taxation on income from any property-based sources. If you are renting the property out to people, for instance, the LLC structure ensures you only pay one set of taxes, rather than paying both a company tax and a personal tax on your share of the profits.
- Avoiding taxation altogether. Some parties use LLCs and property ownership to conceal the source, distribution, and ownership of funds under their control. Sometimes they do so simply out of a desire to avoid excess taxation; sometimes they do so for more nefarious reasons. Regardless of your particular purpose, forming an LLC for your real estate makes concealing assets much easier.
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