How to transfer property from a person to an LLC

You want to protect yourself from tax liabilities related to investments. If you own investment properties, that may mean transferring ownership from you as an individual to a limited liability company or LLC. And if you own multiple properties, you might consider forming multiple limited liability companies to protect each rental property from any claims against your other properties and minimize your personal liability.

The following information will help you decide if it's beneficial for you to transfer property from individual ownership to an LLC. Additionally, this will help you know the steps to take in order to transfer your rental property to an LLC.

Benefits of transferring property from an individual to LLC

There are several benefits for property owners of transferring ownership from an individual to an LLC. These include financial and managerial benefits, as well as liability protection.

Financial protection

Transferring your rental property to an LLC from individual ownership primarily protects your personal finances from any liabilities against the property. For example, if real estate investors currently own rental real estate and someone files a claim against the property, the owners would have personal liability if it were owned by them. If however, you transfer ownership of the rental property from an individual to an LLC, your personal assets are shielded from potential lawsuits or claims by the added layer of liability protection.

Management flexibility

Additionally, transferring ownership to an LLC means more flexibility in managing the investment property. According to Cathy Brown, the editor-in-chief of Lawyers Rankings, "An LLC structure allows for multiple owners and facilitates the transfer of ownership interests which can be advantageous for assets involving multiple stakeholders."

Should your LLC decide to take on employees, you would not be paying them personally, but rather your LLC would pay their salaries. Additionally, the LLC would be responsible for paying employee income tax. A tax adviser or attorney should be consulted for any legal or tax advice related to employees.

Privacy

Another benefit to transferring rental property from individual ownership to an LLC is privacy. When an LLC owns the property, your personal information on real estate records does not become public. Instead, the LLC's address and ownership information is listed on tax records.

How to finance your property

As you prepare to transfer title of your rental property from yourself to an LLC, you'll need to speak with your lender. When you purchased the property, your name and financials were used, and you still have an obligation to pay the mortgage.

Without having any credit history or established income, your LLC will be unable to be the buyer under a new mortgage. It is possible that your lender would be willing to transfer property title without removing you as the mortgage holder, but otherwise, you may have to sign a personal guarantee to pay the mortgage if the LLC is unable to do so.

Another possibility is that your lender could require you to pay the mortgage in full and pursue new financing elsewhere. This is why learning what your own lender requires before attempting to transfer title from yourself to an LLC is essential.

Forming an LLC for your property

For the purposes of owning individual properties, forming an LLC involves first choosing a name for your LLC, which must reflect the nature of your business entity and contain the words "limited liability company," LLC, or L.L.C., depending on your location. Additionally, you will need to name a registered agent for your LLC. Although you can serve as the registered agent, there may be reasons you choose to hire someone else to act as your LLC's registered agent, including privacy. If you are your own LLC's registered agent, your name and address will be part of the public record of your LLC.

Paperwork required for forming an LLC

There are a few pieces of paperwork needed for forming your LLC. First up, you will want to prepare an internal document known as an operating agreement. This will not be filed with the state but will guide you moving forward. In essence, an operating agreement is a blueprint for your business.

You will need to file articles of organization with whichever agency or office handles business filings within your particular state. LLCs can be formed online or in person. In order to complete LLC forms, you will typically need:

• the name of the LLC
• the address of the LLC's place of business
• the purpose of the LLC
• the name of the manager of the LLC
• the name and address of your registered agent
• your signature

Fees vary by state, but most states charge around $100 to file articles of organization for a new LLC. Additional LLC professional fees may be assessed in states that offer expedited processing.

Financial requirements for forming an LLC

An employee identification number (EIN) is a federal tax ID number akin to a Social Security number. The nine-digit EIN identifies your business for federal tax purposes and allows you to open a business bank account. While an EIN from the Internal Revenue Service is only required if your LLC has more than one member or employee, obtaining an EIN is free and will help you keep your personal finances completely separate from the LLC's finances. While you can technically use your own Social Security number for your LLC's tax purposes if you are the only member, it can still be beneficial to use an EIN.

Open an LLC bank account

It is essential that you keep your personal funds separate from your LLC in order to maintain clear records for tax purposes. Open an LLC bank account for any and all financial transactions related to your LLC. Your LLC is a separate legal entity from yourself, and your business finances have to be kept separate.

How do I transfer title of a property from a person to an LLC?

Now that you have set up your LLC, you can transfer your rental property from yourself to the LLC. In order to do this, you will need to obtain a deed form. Your choices are between a warranty deed and a quitclaim deed. Since you want to transfer rental property from yourself to your own LLC, a quitclaim deed form may be sufficient, but this is up to you. A quitclaim deed merely transfers ownership and makes no guarantee that the title is good or even if you own the property and are able to transfer it.

When you purchased the rental property from the previous owner, a warranty deed was more than likely issued by the title company in order to guarantee the title was free and clear. You may wish to obtain a warranty deed in order to protect the LLC if there is any issue with the title discovered later on. There may also be closing costs associated with any such real estate title transfer, and you will need to consult your title company regarding the amount.

Fees vary by state, but most states charge around $100 to file articles of organization for a new LLC. Additional LLC professional fees may be assessed in states that offer expedited processing.

Real estate deed

When you've decided which deed you will use, complete the forms carefully, making sure to match your name to your legal documents as well as the LLC name exactly. You will also need to record the purchase price, and if there is none, you will need to check with the county office in charge of recording deeds for any requirements or minimum amounts. Additionally, make sure you meet any signature requirements, such as signing in front of a notary or having a separate party, such as your registered agent, signing on behalf of the LLC.

Record the new deed for the LLC

In order for the deed to be recognized, you will need to file the paperwork with the appropriate office, which is most commonly the county recorder's office. There may be fees associated with registering the deed, and you will need to check with your local county offices for specific information, although the national average cost of recording a new deed is approximately $125.

Property leases

Now that your property is owned by the LLC, you will need to update all related paperwork, particularly any lease agreements. Moving forward, your tenants should be paying rent to a separate bank account owned by the LLC and no longer to you as an individual. The more separated your finances are from the LLC, the more liability protection there is for your personal finances.

Tax implications of transferring your property to an LLC

The tax consequences of transferring property to an LLC may vary based on your specific tax jurisdiction. Cathy Brown recommends consulting a tax professional in order to determine whether or not your individual circumstances benefit from the transfer and any potential drawbacks from doing so. She says, "While an LLC is a pass-through entity for tax purposes, meaning that the profits and losses pass through to the members' individual tax returns, there could be tax consequences associated with the (property) transfer itself. These may include transfer taxes, recording fees, or potential capital gains taxes depending on the circumstances."

When Eric Bramlett, the owner of Bramlett Residential Real Estate in Austin, Texas, transferred his personal property to an LLC, he was able to deduct certain business expenses that he would not have been able to deduct as an individual. "The LLC was able to access certain tax benefits that were not available to me as an individual, resulting in considerable savings," Bramlett says.

Bramlett also cautions that the experience varies between individual situations but that, generally speaking, transferring property from an individual to an LLC is beneficial, tax-wise. He says, "Generally, transferring property from an individual to an LLC may reduce the overall tax burden by allowing a greater degree of flexibility in terms of deductions and other tax advantages."

Additionally, you should consult a tax adviser for assistance in filing year-end taxes for your LLC.

Transferring property from an S corp to an LLC

Another possibility is that you've already established an S corp and want to transfer your rental property to an LLC. This can be done one of two ways: by converting your S corp to an LLC or transferring the property. When transferring property to an LLC from an S corp, however, the S corp must acknowledge gain or loss on the distribution. There are specific parameters for tax-free transfer, but you should to consult tax experts for further requirements and any tax consequences.

Avoiding property tax reassessment in California

California law requires a property tax reassessment when the property is transferred from one person to another, which can be very expensive. In order to avoid property reassessment when transferring to an LLC, the individual transferring the rental property must own 50% of the LLC. If the owner of the LLC decides to transfer ownership of more than 50%, a property tax reassessment will be required. The property's fair market value will be reassessed upon the death of the LLC owner and property taxes adjusted.

Transferring the title of your investment property from individual ownership to an LLC is a good start at protecting your personal assets, but it is just one step. You should also review your current insurance and consider whether or not your liability coverage sufficiently meets your needs if a claim is made against you.