Limited-liability corporations help homeowners maintain privacy and tax law makes them attractive
Here’s a link to Robyn Friedman’s Wall Street Journal article on property ownership and LLCs.
When you think about it, privacy is an especially valuable commodity, especially in today’s day-and-age. And who wouldn’t want to take maximum advantage of today’s tax laws?
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.”
LLCs are relatively easy to set up, but specific requirements vary by state. Do check with your attorney and CPA for more information.
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.
Make Sure You Read the Mortgage Contract First
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!