Updated September 7, 2021:

Can an LLC own property in another state? If you want to buy or already own an investment property, consider switching it to an LLC. By doing this you can protect your assets and also have some tax incentives.

Let's say someone injures themselves in a rental property and sues you. If you're the individual owner all of your assets are at risk, like your savings and home. If the property is under an LLC, the asset risk is limited to the investment in the LLC. This is also the case for fire claims or environmental issues.

LLCs offer more tax flexibility and offer asset protection of the business. For example, if your LLC is just you, you can be taxed as a sole proprietor so income gains are directed to you and you pay the taxes. There's no double taxation in an LLC.

Advantages of LLC

  • Having a multi member LLC can be advantageous instead of a single LLC. For instance, one spouse can transfer half of the property to the other without tax consequences. Each spouse can then transfer half of their interest in the property to the LLC to obtain a half interest.
  • Choosing a state for your LLC can have its advantages in terms of asset protection. If there's more than one member in the LLC, it can be taxed as a partnership. The gains will be directed to the members.
  • An LLC can also be taxed as a C or S corporation if it meets the requirements. Many choose S corporations for the reduced taxes.
  • You can avoid the hassles of a corporation like boards of directors and meeting by choosing an LLC.
  • Another benefit to an LLC is that estate taxes can be reduced by giving your children LLC interest gifts. If you make these kinds of gifts instead of cash or property, they will be difficult to be taken by creditors.
  • If you're a property owner of more than one property then you can put the properties in a separate LLC. Your liability is limited to the property interest and the interest in other properties is protected.
  • You can also reduce administration costs by opening a single LLC and having a lot of sub LLCs that each have their own properties. Otherwise, if you have many properties think about opening a LLC in Delaware.
  • It's best to seek the advice of a LLC Formation attorney or a certified accountant to make sure you are getting all the tax advantages and asset protection that you can use.

Is Each State Created Equal for LLCs?

Each state treats LLCs differently. You can establish your LLC in a place where you'll receive more benefits such as taking discounts for taxes or yearly exclusion gifts. Delaware is a state which makes more sense for these benefits.

Disadvantages of LLC

  • There are expenses to opening an LLC, such as startup filing fees, depending on which LLC you set up.
  • If you replace a water heater in a rental and a tenant is injured because it explodes out of a carelessness, the tenant can still sue you because of negligence. It can also be true if you hired someone, since this person should be supervised by you. Many property owners form an LLC and hire contractors for repairs and maintenance for this reason.
  • You have to deed the property to the LLC or you'll still be considered the owner; you'll also need to change the insurance for the LLC. If your name is on the policy the insurance can refuse to cover claims.
  • If you bought an insurance policy for the property under an owner's title and did not buy the enhanced one, the protection can be lost if the property is transferred.
  • The mortgage needs the lender's permission in order to transfer property. Commercial financing is not as great as residential financing, for instance there's a higher interest rate.
  • If you already make payments for a commercial financing these should be the same. If the lender requires commercial financing and you have residential financing the payments will be more.

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