Time and time again one of the greatest questions we get from our clients is; should I put my Rental Home in an LLC? The answer oftentimes is not as obvious as one might think. Let’s tackle this age old question and show you how to do exactly that.
BENEFITS OF PUTTING YOUR RENTAL PROPERTY IN AN LLC:
Now putting your rental property in an LLC does not limit your chances of being sued for various reasons. However it does limit the extent of such a lawsuit, especially when paired with the right insurance policy.
Think about it like this, without an LLC, if someone were to become injured while renting your home, they could potentially create a lawsuit that would expose every asset you own that is not equally protected by an LLC. Another way to think about it, is to consider each LLC as a Silo. This means that your exposure is limited to whatever is contained in that Silo. So with your rental home inside an LLC you are limiting the liability exposure to the contents of what that LLC owns.
LLC’s are often single member or multi-member depending on who might be investing in rental real estate with you. Majority of the time this takes on the tax status of a pass-through entity such as a General Partnership (Form 1065) or an S-Corp (Form 1120S).
A Pass-Through Entity can be used in various ways to help you save on your taxes. The LLC will have its own set of books and will record the rental activity on its own tax return, which will then flow through to your individual income tax return via K1 Statement. This creates a clear and distinguished legal entity apart from yourself, and ensures that your business finances and personal finances are separate.
HOW DO I PUT MY RENTAL PROPERTY INTO AN LLC:
There are a couple of steps to accomplish this, but it is not as difficult as you might think, and given the benefits above it is in your best interest.
STEP 1: Passing Ownership to your LLC before or after you individually own the property
If you have already purchased the rental property and you are just now arriving at the benefits of LLC ownership, there are some considerations you need to understand in order to successfully pass ownership to your LLC.
Let’s start by defining some terms surrounding the ownership of real property. First a property title is the right to ownership over a parcel of land or real property. Title refers to the legal document known as a property deed which states who the owner is. If the Title and Deed are currently in your name you will need to transfer this ownership into the LLC’s name with the aid of a Real Estate Attorney or a Title Agency(An agency owned by a real estate attorney).
They will help you create a Quit Claim Deed that transfers ownership rights. Keep in mind that sometimes states will charge a transfer title tax, which is assessed due to the privilege of transferring title. In addition, the Title agency or Real Estate Attorney will charge a fee to create a simple quit claim deed.
Title Transfer Tax: In Greenville County this is equal to $15 Per Deed plus $0.55 per $500 in transferred value.
Title Agency Fee: In Greenville County this can vary depending on who you use: $200-$400/hr
If you are purchasing a Rental Property and you want to put it inside an LLC from the start, you would create an LLC through Simple Start LLC, and once registered with the state you would notify your Realtor and Mortgage Broker that you are purchasing this property as a rental. Then you would provide the LLC documentation to the realtor at the time of purchase. Later the Mortgage broker and Title Agency would need this same documentation to commence the financing and title to the property.
STEP 2: Secure Financing or transfer Financing of your Rental Property to/for your LLC
If you already own the Rental Property and have an existing mortgage you need to first notify your Mortgage company before transferring Title. Oftentimes your name is already on the note to the property you have financed and if the Deed is now in your LLC’s name you have compromised the foreclosure rights of your lender.
Some lenders however allow you to transfer title and they will compensate themselves on the risk by increasing their interest rate to the loan. Bottom line, contact your lender and find out what their policies are for transferring the title with an existing mortgage.
If you are purchasing this Rental Property and have not yet put it in your name. Then get with your preferred lender and find out what their requirements are to LLC ownership of a Rental Property. This will ensure a smooth transition of rental property ownership from the seller to your LLC with the appropriate terms.
If you are curious about how to create an LLC, read here. Limiting your liability exposure is extremely important when using real property to create a steady source of passive income. Many people around the country often own anywhere from 1 to 30 rental properties depending on the goals of each individual. We would encourage you to create an LLC for each rental property and protect your passive income status as you grow a successful portfolio of rental properties. If you’re interested in putting your rentals in LLC’s reach out to us and allow us to get you started in making this transition, whether it is your first rental or fifth, it’s never too late to create liability protection using an LLC.