Key Takeaways:

  1. LLCs protect personal assets from property-related liabilities.
  2. LLC ownership provides privacy by concealing owner identity.
  3. Financing for LLCs often requires a strong credit profile or personal guarantee.
  4. Transferring a primary residence to an LLC can negate capital gains exclusions.
  5. You should always consult a legal expert to navigate LLC ownership complexities.

For many entrepreneurs–especially those who own a small business–a strategic way to manage real estate investment can involve putting your property in an LLC (Limited Liability Company). In other words, in some circumstances, your LLC can buy your house and help you access many financial benefits such as asset protection, potential tax advantages, and enhanced privacy. 

However, this may not always be the best option for some primary residences. Here’s a deep dive into the pros and cons of LLC homeownership, along with critical legal considerations to help you make the right choice.

Advantages of Using an LLC to Buy Real Estate

When it comes to homeownership, using an LLC to buy real estate property can be a smart move, especially when you factor in long-term benefits and financial gains. Below are some of the reasons why many business owners use LLC to buy real estate. 

  1. Asset Protection

One of the main reasons why business owners consider using an LLC for real estate ownership is because of the liability protection it offers. 

When an LLC owns the property, it separates the owner’s personal assets from the property itself. This is because of the nature of LLCs themselves–in an LLC, the business is treated as a separate legal entity, and therefore any assets owned by the LLC become the responsibility of the business. 

This means that in case of any legal complications related to the property—such as a tenant injury or ownership lawsuits—the personal assets of the LLC members (or the business owner) are generally protected. For this reason, many business owners use LLCs for buying rental or commercial properties, where the potential for liability is higher and there is a stronger need for asset protection.

Privacy Benefits

Another benefit of buying real estate through an LLC is the added privacy it provides. When a property is purchased under an individual’s name, the ownership details typically appear in public records, and is therefore accessible to anyone who may look it up. 

Using an LLC instead conceals the identities of the owners, as the LLC itself becomes the property’s registered owner.

This privacy protection is particularly helpful for individuals who wish to keep their investments discreet. In states that allow for LLC anonymity, property ownership can be even more challenging to trace, providing an added layer of confidentiality.

Tax Structure Benefits

LLCs are known for being “pass-through” entities–that is, in an LLC, all profits and losses from the business are passed through to the owner’s individual tax returns.

This means that when you own an LLC, you are only taxed once, instead of the double taxation that occurs with other corporations.

For real estate management, this means that by putting your property in an LLC, you can enjoy tax benefits. Moreover, in some states, transferring property to an LLC might bring state-specific tax exemptions or other incentives, adding to the cost-effectiveness of an LLC structure. 

However, tax regulations vary widely according to jurisdiction, so make sure to consult an attorney before finalizing a decision 

How LLCs Pay for Real Estate Purchases

There are many flexible ways for you to purchase real estate through an LLC. From direct financing to using cash reserves, you might find that purchasing property might be a smoother process. Let’s look at some of the ways that an LLC can pay for real estate purchases. 

1. Direct LLC Financing

If your LLC has a strong credit profile, it might be possible to purchase real estate with direct LLC funds. Usually, lenders view LLCs as high-risk borrowers, which is why they may impose higher interest rates or stricter loan terms for an LLC mortgage compared to a personal mortgage. 

But if your LLC has an established creditworthiness and a stable income history, you might be able to purchase property with LLC funds.

2. Personal Guarantees

In many cases, lenders may require a personal guarantee from one or more LLC members. This means that, despite the LLC owning the property, the individual signing the guarantee becomes personally liable if the LLC defaults on the loan. While this may seem contradictory to the LLC’s limited liability advantage, it can be necessary for LLCs without an established credit history.

By offering a personal guarantee, LLC members increase the lender’s confidence, which may lead to better loan terms. However, it’s important to weigh the risks, as a personal guarantee means that your personal assets could still be at stake if the LLC cannot fulfill its loan obligations.

3. Using LLC Cash Reserves

If the LLC has substantial cash reserves, it can directly fund the property purchase without relying on outside financing. Alternatively, an LLC member may choose to lend money to the LLC for the property purchase, setting up terms and interest rates. Using internal funds offers the benefit of full ownership and greater control over the financing process.

However, even with self-funding, LLC members should be cautious about maintaining clear financial boundaries between personal and LLC funds to avoid piercing the corporate veil (explained below).

Can You Put Your Own Home in an LLC?

Now that you know that it’s possible to use an LLC for purchasing real estate, the ways to do so, and the benefits that come with it, you may be wondering: “Can my LLC buy my house?” 

While using an LLC to purchase commercial or rental property can be a smart move, doing so for your primary residence can come with significant risks: 

  • Piercing the “corporate veil”: The reason why rental or commercial property benefits from being purchased through an LLC is because in theory, it is being used for the business’s purposes. But if a property is found to be used for personal reasons, then the LLC’s limited liability protection may no longer apply to it. This essentially “pierces the corporate veil” as the asset is no longer being used for corporate reasons but rather for personal reasons, making the owner of the business personally liable for the property.
  • Tax implications: As mentioned earlier, LLCs are generally considered high-risk borrowers, and therefore transferring your primary residence to an LLC means you will be charged higher interest and mortgages. 

Disadvantages of Holding a Home in an LLC

Although you can buy a house in an LLC and enjoy many benefits from doing so, you should also consider some of the risks associated with this decision.

1. Loss of Capital Gains Exclusion

Capital gains tax exclusion applies to individuals for their primary residence and is not available to LLCs. While buying a house with your LLC can come with certain financial benefits and protection, if you choose to sell the property, the full capital gain is subject to taxation as it was under the ownership of the LLC. 

2. Mortgage Restrictions

If you currently have a mortgage on your home and wish to transfer ownership to an LLC, be mindful of potential due-on-sale clauses. These clauses allow lenders to demand full repayment if ownership of the property changes. While some lenders may agree to a transfer to an LLC, others may enforce this clause, necessitating refinancing or paying off the mortgage in full.

3. State Transfer Taxes

Many states impose transfer taxes when property ownership is changed, even if it’s just a transfer to an LLC controlled by the same individual. These transfer taxes vary, and in some areas, they can be substantial. Consulting with a legal expert or accountant familiar with local regulations can help you understand the potential tax burden of an LLC transfer.

Should You Buy or Transfer a Home to an LLC?

Considering both the benefits and drawbacks of buying a house with an LLC, you may consider putting commercial or rental real estate into LLCs to maximize benefits and minimize risks. However, if you’re considering transferring a primary residence to an LLC, the cons may outweigh the benefits.

Consulting a Legal Professional

The legal and tax implications of LLC ownership are complex, making expert guidance essential. Consulting with a real estate attorney or tax advisor can provide you with personalized insights based on your specific needs. UpCounsel offers expert legal assistance for business owners considering LLC real estate ownership, making it easy to connect with qualified professionals.

FAQs

  • Can you use your EIN to buy a house? Yes, LLCs can use their EIN for property purchases.
  • Can I borrow money from my company to buy a house? Yes, but it must be properly documented as a loan.
  • Can I use my business account to buy a house? Yes, with careful record-keeping to maintain separation from personal funds.