Buying Property and Using an LLC – A Primer
Limited-liability corporations help homeowners maintain privacy and tax law makes them attractive
To that end, many real-estate investors form limited-liability companies with for both protection and tax relief when purchasing property.
LLCs also help homeowners avoid scams, identity theft and frivolous lawsuits.
From the Wall Street Journal article:
“LLCs have long been popular. In Florida, for example, two-thirds (66.6%) of all new business entities formed in 2017 were domestic LLCs, according to the Florida Department of State. But because the Tax Cuts and Jobs Act, in effect since Jan. 1 of 2018, provides favorable tax treatment to so-called pass-through business entities such as partnerships, S corporations and LLCs, the use of LLCs is expected to explode.”
Financing Regulations and Options
Interestingly, if buyers want to conventionally finance their residential or investment property, the original note and loan must be in the name of the buyer, not the LLC. Fannie Mae and Freddy Mac require that residential mortgage loans (including investment properties) are originated and completed in the name of an individual.
Remember, transferring a real estate title to an LLC doesn’t transfer the mortgage. The buyer is still personally obligated to make the mortgage payments on time. In addition, many mortgages have a “due on sale” clause, which means that if you transfer ownership of the property, the lender could require you to pay the full mortgage amount.
Your lender may be willing to allow you to transfer property title to an LLC that you own, as long as you remain fully obligated on the mortgage. Unless your LLC has an established income and credit history, you will also have to sign a personal guarantee that you will pay the mortgage if the LLC cannot.
Finally, the lender could enforce the due on sale clause, requiring you to pay off the mortgage and seek new financing. You should understand your lender’s requirements before you try to transfer title.
With that said, there are options available for borrowers to close inside of the LLC, so do reach out to me for more!