Transferring rental property into an LLC is one way property owners can protect their assets in case of legal action. This is one of the most popular options, due to its tax accounting and easy maintenance. Also, transferring property to an LLC should be neutral when it comes to tax consequences. Be sure to contact us to discuss your unique situation.

Once you have transferred the property, the tax bills will no longer be in your name but in the LLC’s. Opening a separate bank account is critical as this this helps you not to intermingle personal funds with LLC funds, which is extremely important.  If you use the LLC as your personal piggy bank and mix funds, you will void the entire asset protection coverage you desire with this structure.

Transfer Property to LLC with Mortgage

If the property still has a mortgage, you must contact your lender. Before initiating a transfer, loan documents should be reviewed for a ‘due on sale’ or ‘prohibition on transfer provisions’. Many mortgages and loans have a pay on sale or transfer provision which would allow the lender to call the entirety of the loan as due upon the transfer or real property to an LLC. Depending on the circumstances, it may be advisable to obtain the consent of the lender prior to completing a transfer.

Review your title insurance

Before initiating a transfer of real property, the title policy should be reviewed to determine whether the new entity will automatically be insured under the existing policy. Newer title policies include language including wholly owned entities in the “Insured.” If the title policy is older, a request can be sent to the title company to add an endorsement naming the new LLC or entity as an additional insured on the policy.

Casualty Insurance. Simultaneously with any transfer, any casualty or liability policies should be updated to add the new entity as an insured under the policy.  It is best to check with the insurance company prior to the transfer to make sure there will be no issue with this change in the policy

Step by Step process to Transfer Property to an LLC

It is common for owners of both investment and rental real estate to transfer property titles from their name to that of an LLC to help protect their assets. Transferring the property can also help limit your liability if someone suffers an injury on your property and files a lawsuit.

Transferring a property title to an LLC requires eight steps:

  1. If the property still has a mortgage, contact your lender to see if they will allow it.
  2. Complete the formation of your LLC. If you have not yet done so, file your Articles of Organization along with any fees and their forms with your state’s corporations division.
  3. You will need to file for a federal tax ID number and open a business bank account. If your business has more than one owner or has employees, you will need to fill out the appropriate form to obtain an Employer Identification Number (EIN) from the IRS. There is no fee for obtaining an EIN. You will need this number to open business bank accounts, take out loans, file taxes, and process employee payroll.
  4. You will need to obtain a form for the property’s deed. You can secure a deed form from your county recorder’s office or online, or you can have a lawyer prepare the deed for you. Deed forms can vary from state to state, so make sure you have the right one for your property’s location.
  5. You will need to fill out the quitclaim or warranty deed form. On the form, you will be listed as the grantor and the LLC will become the grantee. There might be a section in which to list the purchase price or “consideration.” If you are not exchanging money for the property, contact the county recorder or look up state laws to find the minimum consideration required.
  6. Sign the deed to transfer it over to the LLC officially. Check your state law to see if the signing requires witnesses or notarization.
  7. Record your deed with the proper entities. You will need to have your deed recorded by sending it to the registrar’s office to keep on public record.
  8. Change any lease agreements that might be in effect. Update all leases to reflect the LLC as the landlord now instead of yourself. Make sure rent payments are now made out to the LLC and get deposited in the business bank account.

Again, any transfer should be reviewed by both a CPA and a real estate attorney prior to recording a deed and excise tax affidavit to avoid irreparable harm. This summary is not intended to be all inclusive nor a substitute for full legal review since it is likely that other issues should be considered prior to making a transfer.