Newbies in the field of real estate investing will eventually need to decide on how to structure their business, especially if their portfolios of rental properties are expanding. It is possible to be a proprietor of a rental property and run your real estate business using your personal checking account as an individual, but trouble may rear its head sooner.
A limited liability company (LLC) is a common tool used by seasoned real estate investors in the US to hold their assets and run their companies. By holding your real estate properties in this manner, you can avoid future tenant lawsuits and receive advantageous tax treatment on your rental income.
It merely takes a few easy steps to form an LLC and transfer property into it. However, you need to do it properly and consider your insurance company, mortgage lender, and tax collector. Now, it is time to look at this guide to learn more about transferring your rental property to an LLC.
Step-By-Step Guide to Transferring Your Rental Property to an LLC
You may incur more costs if you do not know the basics of transferring your rental property to a limited liability company. Take note of these steps on how to do it right.
Research and Apply Your Learnings
Talk with a tax professional and a local real estate lawyer before deciding how and where to build your LLC. This way, you will get legal advice tailored to your situation and have a grasp of the tax implications of your plan.
Consulting with professionals, particularly in reviewing your existing contracts, loans, and mortgages, can give you an idea of whether it is advantageous to you to move your property to an LLC.
Then, take into account the filing fees, corporate tax rates, and ongoing compliance requirements when picking a state wherein you will establish your LLC.
Talk with Your Mortgage Provider
If you plan to move a rental property to an LLC, talk to your mortgage lender to avoid the possibility of missing a due on-sale clause. They will inform you of any costs or changes in interest rates that may apply, and whether you can transfer the home title under your current mortgage.
Register the LLC
Your state government - typically with the office of the Secretary of State - is where you must register your LLC. At this stage, you will name your LLC, fill out forms, and pay a registration fee (approximately $100).
An employee identification number will be given once you have completed the registration of your LLC. You can use the EIN when opening a bank account and filing taxes for your LLC.
Be sure to maintain separate bank accounts for your business and personal finances. It is a compliance after you formed your LLC. It is also a way of protecting your LLC status.
Get a deed form online to transfer your rental property to your new LLC. You can make do with a quitclaim deed if you are moving a property you already possess to a new LLC you also own. Using a warranty deed, on the other hand, is advisable if you have co-owners and partners who might want to verify vital details.
Use your legal name and LLC information when filling out such forms. Get some assistance from a local title company if you have any queries. In some instances, there must be a registered agent to sign on behalf of the LLC. Moreover, you will also have to sign the documents before a notary.
Lastly, to make it official, you should file the documents with the county recorder’s office or the county clerk when transferring the title and recording the new deed.
Update Lease Agreements and Insurance Policies
After moving the property to the LLC, be sure to update your utility accounts or any contracts signed with your name. It is also vital to inform your insurance provider regarding the transfer of the property to the LLC and ensure that the said asset is properly insured.
You should also talk with your tenants about the change of ownership and encourage them to sign updated lease agreements under the new limited liability company.
Real estate investors can benefit from organizational clarity, tax flexibility, and personal property protection by moving a rental property to an LLC. However, it is crucial to be aware of the drawbacks, such as potential expenses and limited options for financing and selling the real estate asset.
Giving a general recommendation is almost impossible since rules are different by state. Thus, working with an accountant and real estate lawyer can be a significant help in understanding tax laws applicable to you. Take note that following the rules can increase your chances of success when transferring your real estate property to a limited liability company (LLC).