How To Buy A House With An LLC.

Buying a house is a significant milestone in anyone’s life, whether it’s for personal use or investment purposes. However, for those interested in the latter, using a Limited Liability Company (LLC) to purchase real estate can offer various benefits, including asset protection, tax advantages, and organizational flexibility. In this guide, we’ll explore the steps and considerations involved in buying a house with an LLC.

Before diving into the specifics of purchasing property with an LLC, it’s essential to understand what an LLC is. An LLC is a business structure that combines the liability protection of a corporation with the flexibility and tax benefits of a partnership or sole proprietorship. In the context of real estate investment, an LLC can shield personal assets from potential lawsuits or debts associated with the property.

Benefits of Buying a House with an LLC:

Asset Protection: One of the primary advantages of using an LLC to purchase real estate is the limited liability protection it provides. In the event of legal issues or financial obligations related to the property, the LLC’s assets are typically separate from the personal assets of its owners, shielding them from personal liability.
Tax Efficiency: Depending on the structure of the LLC and its tax classification, there may be potential tax advantages associated with owning real estate through an LLC. Consultation with a tax professional is crucial to maximize tax benefits and ensure compliance with relevant tax laws.
Privacy: Using an LLC to buy a house can offer a level of privacy, as the property is owned by the LLC rather than individuals. This can be particularly advantageous for high-profile individuals or those seeking to maintain anonymity in their real estate transactions.

Steps to Buying a House with an LLC:

Establish an LLC: The first step is to establish a new LLC or use an existing one for the purpose of purchasing the property. This typically involves registering the LLC with the state where the property is located, filing articles of organization, and obtaining an Employer Identification Number (EIN) from the IRS.
Secure Financing/Business Credit: Once the LLC is established, securing financing for the property is the next step. If you want to take the business credit route, you are going to have to look beyond Net 30 vendors and establish bigger lines of credit on your credit report. Tradeline Central and Credit Strong for Business are excellent resources for business credit tradelines. With Tradeline Central you pay one time and you will have your business line of credit with the Small Business Financial Exchange reporting for life. Credit Strong works on a subscription model. Most lenders require a personal guarantee from the LLC’s members or owners, especially if the LLC is newly formed or lacks a substantial financial history. However, some lenders specialize in providing loans to LLCs for real estate investment purposes. First Option Mortgage, Kiavi, Visio, and Lending One are all attractive lenders that provide loans to LLCs.
Conduct Due Diligence: Before finalizing the purchase, it’s essential to conduct thorough due diligence on the property. This includes obtaining a property inspection, reviewing the title history, assessing the property’s market value, and evaluating any potential liabilities or encumbrances.
Draft and Sign Purchase Agreement: Once the due diligence process is complete and financing is secured, the next step is to draft and sign a purchase agreement between the seller and the LLC. This agreement outlines the terms and conditions of the sale, including the purchase price, closing date, and any contingencies.
Close the Transaction: On the closing date, the final step is to complete the transaction by transferring ownership of the property from the seller to the LLC. This involves signing the necessary legal documents, such as the deed and transfer of title, and paying any closing costs or fees associated with the purchase.
Manage the Property: After acquiring the property, the LLC is responsible for managing it effectively. This includes tasks such as property maintenance, tenant management (if applicable), and compliance with local regulations and tax obligations.

Another route you can go is to buy the house personally and transfer it to the LLC. There could be extra fees and taxes that come with this. For example, you may have to pay a deed transfer tax. Talk to your mortgage lender before considering this option. If the mortgage has a due-on-sale clause that would be triggered by the transfer, you will have to pay the remaining full mortgage.

Benefits and Drawbacks of Using an LLC to Buy Real Estate

Benefits

Privacy: If you own a real estate investment business, having an LLC is beneficial to you because it allows you to separate your personal life from your business. Instead of your name and info on the paperwork, it’s the LLCs.
Tax benefits: LLCs remove the possibility of double taxation. This is also known as a pass-through tax structure. This means the LLC will pay the taxes on profits and you’ll only pay taxes on your allocated share.
Make it easier to partner with other investors: LLCs make it easier for people to partner together for investments. This could be with a single partner, or the LLC can be structured to sell shares to distribute profits.
Limited liability: This is the big reason to form an LLC. As the owner of the LLC, you’re not personally liable. The LLC can go into debt or be sued without you having to fear that it will affect you personally.

Drawbacks

Cost: Creating and maintaining an LLC costs money. The fees to set up and maintain an LLC vary by state, but you can expect to pay a few hundred dollars upfront. On top of that, you’ll need to pay yearly filing costs in the neighborhood of $50 – $100.
You may not be able to get a mortgage: Many mortgage lenders don’t lend to LLCs due to the risks involved. If the LLC defaults on the mortgage, the lender could lose out. On top of that, Fannie Mae and Freddie Mac loans as well as government-sponsored loans, like FHA loans, aren’t available to LLCs.
Lose the capital gains tax exemption: Homeowners who profit off the sale of their primary residence don’t have to pay capital gains on the first $250,000 of profit (or $500,000 if married). If the LLC buys the home, it can’t be your residence and you forgo this tax exemption.

The Legal and Financial Implications of Buying a House With an LLC

If you buy a house with an LLC, there are several legal and financial implications you need to be aware of. First, you can’t live in the house that you’ve bought with the LLC. This is what’s known as “piercing the corporate veil,” and if there’s a lawsuit, it can cause the courts to disregard the LLC. The house needs to stay separate from your personal use.

Second, buying a house with an LLC is going to be costly. You have LLC fees, but you also have to finance the purchase. If you’re unable to get a mortgage, you may have to finance in other ways, which could have higher interest rates and shorter repayment periods.

Maximizing Tax Benefits When Buying a House With an LLC

If you optimize your taxes with an LLC, there can be major savings. Properties aren’t taxed directly to LLCs. You’ll only pay taxes on your share of the profits. Also, all LLCs can use depreciation deductions to lower their tax bill further.

To get a full understanding of maximizing your tax benefits when buying a house with an LLC, speak with an accountant or financial advisor. Several LLC structures have different benefits and costs associated with them.

Buying a house offers numerous benefits for real estate investors, including asset protection, tax advantages, and organizational flexibility. By following the steps outlines in this blog and seeking professional advice when necessary, investors can navigate the process of purchasing property with an LLC successfully. However, it’s crucial to conduct through due diligence and carefully consider the legal and financial implications before proceeding with any real estate transaction.