Buying a house under an LLC has its benefits and drawbacks. In this detailed guide, I will address all the technicalities involving purchasing a property with an LLC and some of the frequently asked questions under this context.
A limited liability company, with everything else, is also an entity with its income and assets. As such, it is eligible to purchase and invest in all kinds of real estate, including a house, for any prescribed reasons outlined in the operating agreement of the LLC. The majority of LLCs, under their operating agreements, do allow their members to buy real estate. However, this kind of flexibility also comes with many problems, primarily if an LLC member purchases a house for personal use.
Still, there are many important reasons to opt for refinancing or purchasing a house under an LLC instead of your name, including:
- Pass-through taxation.
- Separation of business and personal finances.
- Liability protection.
Funding for a house under an LLC
An LLC is principally supposed to pay for any purchases, especially for a house or real estate, using its funds to make sure that there’s no confusion concerning who is the property owner. This is very important because disorders always arise when the limited liability company decides to disband and divides its assets among members, or also in the case when it is issued. However, there is a provision in the law that LLC members may lend their money to the company to purchase a house or real estate.
LLCs are also eligible for bank mortgages, which are then approved depending on their debts and credit ratings. An LLC needs to document all financial transactions among LLC members using the required forms by the state where the LLC is located.
Starting an LLC to buy property
Starting an LLC can be an arduous task for even the savviest of entrepreneurs, so adding an LLC for real estate will only further compound the intimidation factor. The LLC structure provides several advantages, and it can be effortless to start an LLC if you take due diligence to follow the standards within your state.
It is a good idea to create an LLC for ownership if your business strategy involves investing in real estate and houses. Not every investor is interested in following this path, so before establishing the business structure, it is ideal to put together a detailed property business plan.
Some investors of real estate assets find the ultimate coverage for potential arising lawsuits created by the LLC’s inherent liability protection worth the startup’s effort. Others don’t, and this largely depends on the expense and the annual conditions to start an LLC in your specific state. You will want to consider seeking liability insurance if the charges and requirements are more than you can deal with.
Liability insurance does not cover as many bases as an LLC does. Also, before you determine the best fit, you need to know what you want from your LLC.
Real estate owners planning to buy, rent or sell multiple properties at a time should seriously consider forming an LLC. With multiple areas of risks from leases, structural integrity to financing, there’s always an avenue for a can-of-worms to invite lawsuits… so you’ll find buying property with an LLC to be well worth the effort.
Can you get a mortgage under an LLC?
The U.S. has a very regulated and defined mortgage market. Most residential mortgages are primarily secured against homes. It means that failure to pay the mortgage on time or involvement in any violations of the terms of your mortgage, can see your property being repossessed.
On top of that, borrowers on a mortgage are considered severally and jointly liable. If one party listed on the mortgage list fails to make a scheduled payment, other parties will still be responsible.
Most mortgage lenders in USA don’t lend to a freshly-formed LLC created solely to buy and own a primary residence. It is also true for an investment property or second home with no other previous income streams. By definition, an LLC is supposed to limit individual liability, which doesn’t sit well with mortgage lenders because it only increases their risk by virtue of on-boarding entities with no track history.
Can I live in a house owned by my LLC?
Yes, you can live in a house that your LLC owns. Going with the apparent benefits that an LLC offers for the property; everyone is recommended to register their home in an LLC – that is the ‘smart’ way to go about it. If someone falls on the sidewalk of your home and sues the owner, it would be suing the owners of the LLC under which the house is listed – losing that kind of legal challenge would be an extremely costly one!
On the other hand, when the house is under your name, you get sued for whatever reason; everything that belongs to you is at risk. This is why buying every one of your properties under an LLC is always highly recommended, as it protects your assets irrespective of whether you are personally being sued.
However, to keep the records straight, you would still need to pay fair market rental of your house to your LLC. Your house rent is not deductible, but the rental income coming from the property is taxable in the business, irrespective of how you have set it up.
If you don’t do that, then you still have a taxable value provided by the LLC. For an S Corp, this would be considered non-cash compensation. That’s why it is always recommended to have a professional consultant on such matters who can provide you all details about the contract between you and your LLC.
FREQUENTLY ASKED QUESTIONS
We have listed down some of the frequently asked questions about this topic and have provided their answers:
- What are the benefits of buying a house under an LLC?
Some of the main benefits that buying a house under an LLC offers are:
- Your liability is limited
- Investing with partners is more manageable.
- It keeps your business separate from your finances.
- You’ll be anonymous.
- It allows for pass-through income.
- How does an LLC buy a property?
An LLC pays for real estate purchases with its funds to ensure no confusion concerning who owns the real estate property. Confusions often arise when LLCs disband and divide their assets or when the company is issued.
- Why would I put my house in an LLC?
Creating an LLC for your house is an intelligent choice as a homeowner. It will reduce your liability risk, separate your assets, along with providing you with tax benefits of pass-through taxation.