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Buying a House with
an LLC

By: Drake Forester | Last Updated August 13, 2021

Considering buying a house under an LLC? Maybe you’ve heard that an LLC can better protect your privacy or your assets. But before you jump in, there are several things you’ll want to consider. On this page, we discuss reasons for buying a house with an LLC, advantages and potential pitfalls to avoid, and answers to some frequently asked questions.

In this article:
Why Buy a House with an LLC?
Can I Live in a House Owned by My LLC?
How to Buy a House with an LLC
Frequently Asked Questions

Why Buy a House with an LLC?

Typically, people purchase a house under an LLC for real estate investment or rental property purposes. However, many regular people wonder if buying their home with an LLC makes sense for them.

On one hand, LLCs can offer increased privacy and asset protection, as well as options for estate planning. On the other hand, buying a home with an LLC can mean additional costs. And if you plan on living in the home owned by your LLC, you may struggle to maintain liability protections and face various legal and tax implications.

Advantages to Buying a House with an LLC

  • Privacy. There’s a reason those in the public eye often put properties in LLCs. The county recorder’s office files and records most real estate transactions. These documents are public records—meaning anyone could request access to them. Buying a house under an LLC ensures the business’s name—not yours—is listed on these public filings.

    You could also take steps to protect the owners of the LLC further. For example, instead of filing the Articles of Organization (or your state’s equivalent) yourself, you could hire a professional registered agent company to do it for you. Often they’ll allow you to list their information instead of yours.

  • Limited Liability. An LLC is considered a separate entity from its owners. That means you won’t typically be personally responsible for any debts or lawsuits incurred by the business. This is why real estate investors often choose LLCs. Properties have liability risks—a prospective buyer or tenant slipping on a patch of ice could easily turn into a lawsuit.

    The average Joe can also benefit from these protections against property risks. However, regular home buyers are often more interested in protecting the LLC (and the house) from personal debts or lawsuits. Generally, if a creditor were to take legal action against you personally, assets owned by the LLC (including your house) would be protected. Keep in mind, however, that liability protection isn’t ironclad. Activities like personally living in the house could potentially weaken an LLC’s liability protection. More on this later.

  • Estate Planning. Instead of filing a new mortgage or deed of trust, you can transfer your home to your family by adding them as LLC members or increasing each individual’s percentage of ownership in the LLC. You can also include provisions in the LLC operating agreement (a document outlining the business’s rules and regulations) stating that your home should be passed down to your children.

 

Disadvantages to Buying a House with an LLC

  • Limited Financial Options. Buying a house with an LLC will likely disqualify you for a government-backed loan like a Federal Housing Administration (FHA) loan. Banks are often reluctant to set up a mortgage for an LLC because of the liability protection an LLC offers, so conventional loans can be tricky to obtain, too. If the LLC fails to pay its mortgage, it will be harder for the bank to hold you personally accountable for the business’s debts.

    Lenders may ask for copies of your personal income/credit information. In addition, you’ll likely need to provide a personal guarantee, promising you or another individual will accept financial responsibility if the LLC doesn’t pay back the loan.

  • Annual Maintenance Costs. Forming and adequately maintaining an LLC can be costly. Depending on where you live, initial filing fees can range from $50 to $500. In addition, most states require LLCs to file an annual or biennial report. These fees average around $100 but can top $500. There may be additional tax obligations as well. In California, for example, the majority of LLCs are subject to a minimum of $800 a year in state taxes.
  • Piercing of the Corporate Veil. The phrase “piercing the corporate veil” refers to when a court determines that a business and its owners are not truly separate entities.

    Often, this happens when the owner of an LLC mixes personal and business affairs. Piercing of the corporate veil could result in a company’s owners being held personally responsible for business debt. Or it could mean that the business’s assets are on the table for personal creditors.

    To avoid blurring the lines between yourself and your business, you’ll need to keep finances strictly separate. At minimum, that means, separate bank accounts and separate recordkeeping. But what if you plan on living in a house owned by your LLC? We’ll take a deeper look at this in the next section.

Can I Live in a House Owned by My LLC?

Yes. However, living in a house owned by your LLC may not be the best idea—unless you’re a celebrity, really value privacy, or have a stronger than average need for asset protection.

Basically, the gains need to be worth the headache of navigating the variety of legal and tax implications that can develop. Here’s a quick breakdown of some of the most common obstacles people run into:

Taxable income or losses

Since the LLC owns the house, you couldn’t live in the house for free—that would be mixing business and personal use. So, you would most likely need to pay rent or offer other compensation. Depending on your LLC’s expenses, that rental income could result in a tax headache for your LLC.

Too much rent could create potential taxable income for the LLC. Not enough rent or other passive income? Your LLC could wind up with a passive activity loss (PAL), as described in IRS Publication 925. These losses can only be offset with passive income and typically carry over into the following year. There are deductions available, but they’re not always easy to qualify for. For example, if you “actively participate” in the business and make under $150K year in W2 wages, you may qualify for some deductions.

Lost tax breaks

When a home is held in an LLC, you can miss out on some of the tax benefits common to regular residential homeowners.

  • Property tax breaks. In some states, property taxes are significantly lower for homeowners who live in their own property. For example, Florida allows homeowners (not LLCs) to deduct up to $50,000 from the assessed value of a primary/permanent residence. This tax break typically only applies for the first year you are living in the home. However, veterans or residents 65 years or older may qualify for multiple years.
  • Capital gains exclusion. When it comes time to sell that property, you could end up having to pay a hefty capital gains tax. Typically, when one person sells a home to another, you wouldn’t have to pay taxes on the first $250,000 of profit as a single individual. However, you forfeit this luxury when an LLC owns your home. If the LLC owned the home for more than a year, the capital gains tax rate would be 0%, 15%, or 20%—depending on how much taxable income your LLC earned. If the LLC owned the home for one year or less, the captain gains tax rate would correspond with your personal income tax bracket.

 

The Bottom Line

Buying a home with an LLC can be great for privacy, liability protection, and estate planning—especially if you’re looking into real estate investments or rental properties.

However, keep in mind, that costs can be high, and living in the home can significantly reduce your LLC’s liability protection.

So, living in a house owned by your LLC will probably create more of a headache than real perks for the average person. But, if you have a significant need for privacy or asset protection, then jumping through the maze of hoops might be worth it for you.

How to Buy a House with an LLC

Buying a house with an LLC isn’t too different from purchasing one under your name. However, there are some differences you’ll want to know. For example, you’ll likely need to open a business bank account, which may require obtaining an EIN (Employer Identification Number). The IRS has a free online EIN application.

Next, you’ll want to consider how much your LLC can afford and potential financing options. As stated earlier, most lenders will be reluctant to set up a mortgage because of the liability protection an LLC offers. If you have issues finding government-backed loans, you can consider private or asset-based lenders—which involve using personal assets as collateral.

Once you find a home, your LLC will make a formal offer. Although you will be acting as a representative of your business, it’s crucial to make it clear to the sellers that the LLC will ultimately be making the purchase. So, instead of listing your personal information in the offer letter, you would include your LLC’s name and address.

When the seller accepts your offer, you’ll write a check (using your business bank account) and sign the sales contract as the owner of the LLC and not the actual purchaser. So, any related documents should list the LLC (not you) as the official homeowner.

Frequently Asked Questions

Can an LLC get a residential mortgage?

Absolutely. To get a mortgage under an LLC, you’ll likely need to provide the following information:

  • Articles of Organization
  • Certificate of Good Standing
  • Financial information for the LLC—including bank and credit card statements and tax information.
  • Personal income, debt, and credit information.

Although finding a mortgage lender for an LLC may be challenging, it’s certainly not impossible. Check local banks and credit unions in your area—they’ll often have the best interest rates. You can also look into online companies or search for a private lender.

Can my LLC buy my house?

Yes, you can transfer an existing mortgage under your personal name into your LLC. However, you’ll need to review your current mortgage documents beforehand. Most mortgages include a due-on-sale clause, which requires full payment of any remaining loan balance. However, don’t let this discourage you. Talk with your lender. They may be willing to work with you and agree to an assumption clause, which allows you to transfer fiscal responsibility to the LLC.

Will selling my house to an LLC affect my personal finances?

Maybe. Suppose your lender allows you to transfer ownership of your home to your LLC. In that case, they may increase the interest rate or charge an assumption clause fee—typically between $800 – $1000. Plus, your LLC’s loan could still show up on your credit report if you personally guarantee the mortgage. But, of course, paying the loan off on time will prevent it from having a significant impact on your credit score.

Now that you know all about buying a residential home with an LLC…..

LEARN ABOUT FORMING AN LLC FOR REAL ESTATE INVESTMENTS

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