When purchasing an investment property, it may make sense to use a limited liability corporation (LLC). While there will be some obstacles to overcome, purchasing a home through an LLC can have numerous legal and financial advantages. Here’s how to buy a house with an LLC and what you should know before you do it.
You can work directly with a financial advisor to help you choose the best tax strategy for your company that will benefit your personal taxes.
The Fundamentals of Using an LLC to Purchase a Home
LLCs are used in real estate because they shield the property owner from legal action. For example, if you form an LLC to own your rental properties, if there is a problem and a tenant sues, they will not sue you. They’ll sue the LLC without mentioning your name. Depending on the type of LLC, there may also be some tax advantages to owning a property through an LLC.
To begin purchasing a home with an LLC, you must first create an LLC. If you don’t have one, you can look into how to set one up in your state or hire someone to do it for you. Because LLCs are governed by states, each will have different requirements and fees for establishing one.
You will need to finance the purchase once you have established an LLC. Unfortunately, many mortgage lenders do not lend to LLCs. Many types of residential mortgages, including FHA and conventional loans, are not available to LLCs. Nonetheless, financing for LLCs is available. It may just come with additional costs.
Another option is to buy the house personally and then transfer it to the LLC. This could result in additional fees and taxes. You may be required to pay a deed transfer tax, for example. Also, before you consider this option, consult with your mortgage lender. If the mortgage has a due-on-sale clause that is triggered by the transfer, you must pay the entire remaining mortgage balance.
- Privacy: Having an LLC is advantageous if you own a real estate investment business because it allows you to separate your personal life from your business. The LLCs appear on the paperwork instead of your name and contact information.
- Tax advantages: LLCs eliminate the possibility of double taxation. This is referred to as a pass-through tax structure. This means that the LLC will pay the profits taxes, and you will only pay taxes on your allocated share.
- Make it easier to collaborate with other investors: LLCs make it easier for people to collaborate on investments. This could be done with a single partner, or the LLC could be set up to sell shares in order to distribute profits.
- Limited Liability: You are not personally liable as the LLC owner. The LLC can go bankrupt or be sued without affecting you personally.