Putting property in an LLC is a common strategy for new businesses, landlords, and real estate investors. It's not a difficult process, but it's important to document the transaction and consider the tax consequences.
You might put property into an LLC for two main reasons:
- To capitalize your business. A new business needs assets to get off the ground, and owners typically make capital contributions that might consist of cash, personal property, or real estate. In exchange, the owners get equity in the business.
- For liability protection when you own investment real estate. An LLC helps shield property owners' personal assets if a lawsuit or debt collection action involves their rental or investment property.
Transferring Cash and Personal Property to an LLC
If you're starting a new business, you'll probably put some of your own money into it. You may also transfer personal property like office equipment, tools, or vehicles to the business.
But transferring property to the business isn't as simple as moving money around or taking your printer to your new office. To avoid tax problems and keep your company books in good order, you need to properly document the transaction. Follow these steps:
- Research the fair market value of anything you're transferring to the company.
- If you are transferring personal assets in exchange for a stake in the company, record the asset, purchase price, fair market value, and depreciation in your LLC operating agreement.
- If the company is buying the assets from you for cash, record the transaction in your accounting records.
- For titled assets like vehicles, make sure titles are properly transferred. If there's a vehicle loan, be aware that you may need lender approval before making any transfers.
If you're not familiar with business accounting, it's a good idea to have an accountant or business lawyer help you properly document asset transfers and startup costs.
Transferring Real Estate to an LLC
Transferring real estate to an LLC is a common asset protection strategy for landlords. First, you'll need to form an LLC by filing articles of organization with your state's business formation agency.
If there's a mortgage on the property, contact your lender to find out about restrictions on transfers and get approval for a transfer to your LLC. It's important to realize that transferring property to an LLC does not relieve you of personal responsibility for paying the mortgage.
Next, get a form for a warranty or quitclaim deed that's valid in your state, or have a lawyer prepare a deed for you. When you buy real estate from someone else, you'll usually get a warranty deed that guarantees the title to the property is good. But many people use a quitclaim deed to transfer property to their LLC. A quitclaim deed simply says that you're passing whatever interest you own in the property to the LLC.
A deed must be signed, and it may need to be witnessed or notarized to be valid, depending on your state. After it's signed, take it to the city or county agency that handles real estate records so it can be recorded.
Once the transaction is complete, you can amend your lease to say that the LLC is now the landlord. Be sure to establish a bank account for the LLC and handle all income and expenses on your rental property through the LLC account.
Should I Put My Property in an LLC?
Several factors determine whether you should put your rental property in an LLC, including the impact on your taxes, potential liability exposure, and your lender's willingness to approve a transfer.
However, it's not generally recommended that someone put their house in an LLC. While you can put your personal residence under an LLC, that can have unpleasant tax consequences, including losing homestead tax exemptions and the capital gains tax exclusion when you sell.
You can put property under an LLC by following good accounting practices and completing and filing a few forms. But transfers to an LLC can have ripple effects, so it's best to sort through the pros and cons with a lawyer or accountant before you get started.