As a rental property owner, you might be enjoying many benefits. These can include cash flow, depreciation, and tax deductions.
But if you operate that property either by yourself or in partnership with others, you’re probably also aware of the liabilities inherent with ownership. If someone falls while on your property and is injured, that person could sue you for medical damages—and you could lose all of your assets.
This is where forming a limited liability company for your rental property might be helpful. An LLC is a business structure that combines your sole proprietorship or partnership pass-through taxation with a corporation’s limited liability. While you still pay personal taxes as an LLC member, you’re not responsible for the LLC’s liabilities.
So if the above-mentioned person slips and falls while on your LLC-owned property, any lawsuit that results likely won’t impact your personal assets.
Another advantage is that in many cases, LLCs are relatively easy and inexpensive to form. Requirements for an LLC vary based on the state in which the business structure is formed. But the following is a general process involved with transferring your rental property to an LLC.
Contact Your Lender
If your rental property carries a mortgage, get in touch with the lender. In some cases, the lender might allow the property loan to be transferred to the LLC. But depending on the loan’s structure and lender requirements, you might need to pay off the existing financing and obtain a new mortgage under the LLC.
File the Paperwork
The LLC is a state entity. So you need to file the necessary paperwork as required by the state in which you’re doing business. Documents include Articles of Organization and an Operating Agreement, as well as member contact information, the LLC’s physical address, number of members, and the registered agent.
Obtain an Employer Identification Number
An Employer Identification Number (EIN), also known as a Federal Tax Identification Number, identifies your business entity to the IRS. In a sense, the EIN is the LLC’s Social Security number. Even if you’re a sole proprietor operating under an LLC, you need that EIN. Obtaining an EIN is fairly straightforward and can be done through the IRS.
Set up a Bank Account
Your LLC needs a bank account that is separate from your personal checking or savings account. This ensures that your business funds are separate from your personal ones. Your bank needs your EIN and Articles of Organization to set up this account.
Fill out and File the New Deed
Now you need to transfer your property from your name to that of your LLC. The process involves the following steps:
- Transfer the title either through a quitclaim deed or warranty deed.
- Sign the deed as the grantor. Depending on the state, you might need to sign in front of witnesses or before a notary. Some states might also require a grantee to sign as the LLC representative.
- Submit the signed deed to the agency that handles real estate records in your municipality or county. This creates a public record of your property transfer.
Change the Lease Agreements
Once the property is transferred to the LLC, you’re no longer the landlord. The LLC is. As such, all leases need to be changed to reflect the new ownership. Tenants also should be notified that payments should be directed to the LLC.
An LLC is one way to help reduce personal liability for any property-related claims. The process is fairly straightforward but can vary from state to state. If you have any questions or concerns, it’s a good idea to contact a real estate attorney for assistance.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.