Can My LLC Buy a House: Everything You Need to Know
Can my LLC buy a house? If the Articles of Organization includes language that allows for it, LLC members can buy real property.3 min read
Can my LLC buy a house? If the Articles of Organization includes language that allows for it, LLC members can buy real property. The problem with this is that too much flexibility means a member might try to buy a residential home for his or her own usage or profit. To eliminate the risk of a member misusing their authority, include specific language in the agreement that will set limits on how many members can purchase real estate on behalf of the LLC.
Benefits of Purchasing Real Estate as an LLC
There can be some benefits when it comes to an LLC purchasing real property:
- A new LLC that purchases real estate can use that portfolio to increase its financial profile which will add to its value.
- A number of states allow LLC members to transfer property to the company in order to receive a LLC tax exemption.
- An LLC can also buy and sell real estate as its sole business.
- Purchasing real estate can offer privacy benefits.
- LLCs can earn some income from any real estate purchases by renting residential and commercial properties to tenants.
How Does an LLC Pay for Real Estate Purchases?
To avoid any confusion with ownership, the LLC needs to purchase real estate purchases with its own money. If the LLC has to disband or there is litigation, there could be confusion during the asset distribution phase if the real estate was purchased by any other source of funds. However, an LLC member can loan money to the business in order to purchase real estate.
Another option is for the LLC to apply for its own mortgage from a bank or mortgage company, which will be approved or possibly denied depending on the LLC's creditworthiness. Be sure you document any financial transactions that occur between members and the business as required by individual states.
Putting Your Own Property in an LLC
It is legally possible to put your own primary residence into an LLC, but it may or may not be the right decision. As a reminder, the LLC's premise is to protect assets. When you create one to house your business or property, it will separate them out from your personal assets. Provided there are the proper separations maintained, any lawsuit brought against the LLC generally cannot touch your personal assets. On the flip side, a lawsuit against you personally cannot touch your LLC assets.
Does your personal home have any purpose related to your business? Because the LLC is a business entity, the home should have a business purpose for any limited liability to apply. There is a risk of the court disregarding your LLC and losing the accompanying liability protection if you run any non-business assets through the LLC.
One way to add a business purpose is to have your home in the LLC then pay rent to the business in exchange for the accommodations. However, you need to be aware of serious tax implications here because the rent becomes taxable income for the business and therefore taxable income for you personally.
Disadvantages of Having a Home in an LLC
As a homeowner, one of the biggest advantages is the Capital Gain Exclusion that offers single taxpayers an ability to exclude a gain of up to $250,000. Married taxpayers get up to $500,000 on the sale of a home, provided it was the primary residence for you both for two of the previous five years. If you transfer your residence to the LLC, you will give up this benefit.
If it's held in the LLC, the home may no longer be eligible for the homestead exemption on your taxes. You are also prohibited from deductions for property tax and mortgage interest without claiming rental income.
There may be transfer taxes paid on any real estate that is moved, except in a couple scenarios. If you don't qualify for one of these exceptions, and depending on what the home value is, you would wind up owing for transfer tax when you add convert it to the LLC. Also, watch out for specific mortgage clauses that require repayment in full if the property is transferred to an LLC.
If you need help with understanding whether an LLC can purchase a home, you can post your legal need on UpCounsel's marketplace. UpCounsel only accepts 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.