Individuals who want to purchase a rental property may decide to form a limited liability company (LLC) to protect their personal assets from liability. When they face difficulties in obtaining financing for the LLC, they might decide to finance the property as individuals and then transfer title to the property to the LLC through a quit claim deed. Or someone who already owns a rental property may decide to transfer it to an LLC, in order to gain the personal liability protection. There are several considerations involved in choosing this method of transferring title to the property.
If the mortgage debt on the property is in the personal name of an owner or owners, transferring title to an LLC could trigger a demand clause in the mortgage contract by the lender. The lender could potentially demand full repayment of the loan. Transferring the mortgage to the LLC would require the lender’s approval.
The transfer of a property to an LLC could be considered a taxable event for federal income tax purposes. If the property is your home and you meet the requirements; that is, you have owned and lived in the home as your main home for at least two of the last five years, you could exclude the gain up to $250,000, or up to $500,000 if you are married filing jointly. But if you have also rented out your home or a portion of it, you may be subject to income tax on the recapture of the depreciation you claimed as a tax deduction.
If the home is your main home and you transfer it to an LLC, you could lose the homeowner’s exclusion of the gain for federal income tax purposes if the home is eventually sold by the LLC.
As pointed out by Samuel J. Tamkin and Ilyce Glink in an article in the Orlando Sentinel, you could lose the homeowner’s exemption on the property if you transfer it to an LLC. This would cause your property taxes to rise. And your property taxes could also be reassessed and your annual real estate tax bill could therefore increase.
The same authors, in an article on ThinkGlink, also indicate that when you transfer a property to an LLC you could lose the coverage you have under the title insurance policy you received when you originally purchased the property. It may be necessary to get a new policy to cover the LLC.
A potential additional cost is the real estate transfer tax levied by the state. For example, according to the Florida Department of Revenue, a state documentary stamp tax is levied on documents such as warranty deeds and quit claim deeds. The state tax is $.70 per $100, up to a maximum of $2,450. Miami-Dade County also charges a tax at a rate of $0.60, plus a surtax of $0.45. The National Conference of State Legislatures provides information on Real Estate Transfer Taxes by state.
As indicated in a post by a commercial real estate broker on the Bigger Pockets website, insurance companies may charge a higher rate for property insurance when the property is owned by an LLC. This broker also points out that a tenant could potentially sue you and the LLC if you are negligent in managing the property. He suggests having appropriate liability insurance and using a property management company.
Before considering a transfer of title to a property to an LLC, it is advisable to consult with a title company or real estate attorney, and a tax professional to weigh the potential consequences based on your particular circumstances.
Sources:
Documentary Stamp Tax, Florida Department of Revenue
Ilyce R. Glink and Samuel J. Tamkin, Quit Claim Deeds for LLC, ThinkGlink
Quitclaim deed to LLC and refinance question, Bigger Pockets
Real Estate Transfer Taxes, National Conference of State Legislatures
Samuel J. Tamkin and Ilyce Glink, Real-estate law: Transferring rental house into LCC has pros and cons, Orlando Sentinel
Reference:
- Financing a Rental Property as an LLC: voices.yahoo.com/financing-rental-property-as-llc-8744343.html?cat=3
- Financing Investment Property – Second Home or Rental Income: voices.yahoo.com/financing-investment-property-second-home-rental-10380381.html?cat=5
- Which Properties Generate the Best Return on Investment? voices.yahoo.com/which-properties-generate-best-return-investment-7635490.html?cat=54
