If you’re a landlord, it means you’re also a small business owner and may benefit from establishing your operation as such. More to the point, you should really consider the advantages of holding your Rental Property in a limited liability company, or LLC. Doing so requires a little extra effort up front, in addition to paperwork and fees, but will provide an extra layer of protection and certain tax advantages. We’ll discuss the process of transferring rental property to an LLC, and why you should consider it.

Should I set up an LLC for my rental property business?

The main advantage of an LLC is, of course, limited liability. This means that your liability for certain lawsuits or business debts is limited to your investment in your business. 

With respect to a rental business, creditors could take your rental property but not your personal home, even if you still owed them money. However, state law may place limitations on your liability protection. For example, if you personally screen tenants or perform maintenance work, you could potentially be sued personally in some states for those actions, even if you have an LLC.

A secondary advantage of an LLC is tax flexibility. An LLC in itself is not a tax vehicle and your profits would still be taxed on your personal tax return. However, it would give you the option to elect S-Corporation treatment, which may allow you to reclassify some of your earnings to qualify for a lower tax rate. 

You should also keep in mind that an LLC requires you to pay additional fees to the government and requires more paperwork. In some states, you have annual requirements to meet in order to maintain your LLC. In many cases, you may find that the additional liability protection outweighs these costs.

How do I transfer rental property to an LLC?

If you choose to form an LLC for your rental business, the LLC will need to be the legal owner of the rental property. This means that the title to the property will need to be transferred from your name to the LLC. The required paperwork is similar to that which is required when selling your home to a third party. Your state may have specific laws about compensation when transferring property. At this point, it is best to check with an attorney to make sure all requirements for the transfer are met.

Can I transfer my mortgage to an LLC?

Whether you can transfer your mortgage to an LLC depends on your mortgage lender. There are several considerations involved, such as.

• The mortgage would likely become due in full according to the mortgage agreement since you are technically selling the property to the LLC, as if you sold your home to another individual. To continue the mortgage, the lender would need to agree to let the LLC assume, or take on, the mortgage.
• Most lenders will require you to personally guarantee the mortgage. This means that the LLC wouldn’t stop the mortgage lender from suing you for your personal assets if you default on the mortgage.
• The property may be for your personal use, depending on how you intended to use the property when you took out the mortgage. If your mortgage disallows commercial rental activities, you may need to modify it or get a new mortgage.

Who owns the property in an LLC?

While the LLC owns the rental property, you still own the LLC. Assuming that you’re the full owner of the LLC, you have 100% control over how the property is used (and whether to sell it back to yourself or to someone else). 

If you choose to sell, you could then withdraw the funds out of the LLC. The main limitation in this endeavor would be if your LLC had any debts that needed to be taken care of first. If you own the LLC in partnership with someone else, your partnership agreement should state how the partners make these decisions.

Understand the implications before you transfer rental property to an LLC

If you’d like to learn more about what an LLC does for you or if you’re ready to get started, Rocket Lawyer’s Incorporation Services make it fast, affordable, and simple. If you have questions about the extent of your liability protection or other legal aspects of running a rental property business, consult with a Rocket Lawyer On Call_® attorney now. Rocket Lawyer also offers a variety of customizable landlord documents for your everyday rental management needs.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

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