Key Takeaways

  • Buying real estate through an LLC offers privacy, liability protection, and potential tax advantages.
  • Mortgages for LLCs are harder to obtain and usually come with higher interest rates and stricter qualifications.
  • Transferring property to an LLC post-purchase may trigger due-on-sale clauses in existing mortgages.
  • Choosing the right type of LLC and properly structuring its operating agreement are essential for legal protection.
  • Investors, landlords, and high-net-worth individuals commonly use LLCs for asset protection.
  • Working with legal and financial professionals is highly recommended when navigating this process.

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.

Why Use an LLC for Real Estate Ownership

An LLC is a popular vehicle for real estate ownership among investors, landlords, and privacy-conscious buyers. Here's why:

  • Asset Protection: If legal claims arise (e.g., a tenant sues over an injury), the LLC structure limits liability to the assets owned by the company, shielding the owner’s personal finances.
  • Privacy: In many states, the LLC name—rather than the individual’s name—appears on public property records.
  • Estate Planning: Holding real estate in an LLC allows for easier transfer of ownership through membership interests, simplifying succession planning.
  • Multiple Owners: LLCs allow multiple people to co-own a property with clearly defined roles and rights through an operating agreement.

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.

How to Buy a House With an LLC: Step-by-Step

Understanding how to buy a house with an LLC involves both legal and financial preparation. Here's a step-by-step overview:

  1. Form the LLC: Before buying the property, register your LLC with your state. This includes naming the LLC, filing Articles of Organization, and designating a registered agent.
  2. Obtain an EIN: Get a federal Employer Identification Number (EIN) from the IRS for tax and banking purposes.
  3. Open a Business Bank Account: Keep personal and business finances separate to maintain liability protection.
  4. Draft an Operating Agreement: This legal document outlines ownership shares, decision-making procedures, and financial contributions.
  5. Get Financing (if needed): Many traditional lenders do not finance residential properties under LLCs. If financing is required, expect stricter underwriting criteria and possibly higher interest rates.
  6. Make the Purchase in the LLC’s Name: The LLC should be listed on the deed. If you're transferring a personally owned property to the LLC, you must file a quitclaim or warranty deed.
  7. Update Insurance: The property should be insured under the LLC’s name. Landlord insurance may be necessary if you’re renting it out.

Benefits

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.

Common Mistakes to Avoid

Many buyers make errors that compromise the benefits of using an LLC. Avoid these missteps:

  • Commingling Funds: Always use separate bank accounts for the LLC to avoid piercing the corporate veil.
  • Failing to Draft an Operating Agreement: Even single-member LLCs should have one for clarity and legal compliance.
  • Delaying LLC Formation: Waiting until after purchase complicates title transfers and may trigger tax or loan issues.
  • Not Consulting Professionals: Real estate attorneys and CPAs ensure your LLC is set up for maximum legal and tax efficiency.

Types of Properties Commonly Purchased With an LLC

While LLCs can be used to purchase various property types, the structure is especially useful for:

  • Rental Properties: Provides liability protection from tenant claims.
  • Vacation Homes: Often rented part-time and benefit from LLC-based liability coverage.
  • Investment Properties: Multiple investors can own a stake through the LLC.
  • Multi-Family Units: Useful when operating several units as a business.
  • Flipping Houses: Helps protect flippers from potential lawsuits and simplifies taxation.

Challenges of Buying a House With an LLC

While the advantages are substantial, there are also challenges to consider:

  • Financing Limitations: Many lenders won’t issue a traditional residential mortgage to an LLC. Business or portfolio loans are often required, which may carry higher interest rates and down payments.
  • Due-on-Sale Clause: Transferring a mortgaged home into an LLC could trigger this clause, requiring full repayment of the loan.
  • Higher Operating Costs: LLCs have ongoing fees such as annual filing, registered agent fees, and separate tax filings depending on the state.
  • Limited Mortgage Interest Deduction: LLCs are not eligible for certain personal tax deductions like the mortgage interest deduction for primary residences.
  • Insurance Complications: You'll likely need commercial property insurance or landlord policies if the property is income-generating.

Frequently Asked Questions

  1. Can I get a mortgage with an LLC?
    Yes, but most residential mortgage lenders require the loan to be in your personal name. Business or portfolio lenders are more likely to work with LLCs.
  2. Is it legal to buy a primary residence with an LLC?
    Yes, although it is uncommon and may limit your ability to secure a traditional mortgage or claim tax deductions.
  3. Will transferring my home into an LLC trigger taxes?
    Possibly. You may face transfer taxes, capital gains taxes, or a due-on-sale clause depending on how the transfer is structured and your loan terms.
  4. Can I use an existing LLC to buy a property?
    Yes, but ensure that the LLC is structured for real estate use and that the operating agreement reflects the new asset.
  5. Do I need a lawyer to buy a house with an LLC?
    While not legally required, hiring a lawyer can help avoid costly mistakes and ensure full compliance with local and federal laws. You can find a qualified attorney on UpCounsel to assist with this process.

If you need help with buying a home with your LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.