Can I Buy a Home with an LLC?

If you’re buying an investment property, it may make sense to buy it using a limited liability corporation (LLC). While there are certain hurdles you’ll have to clear, buying a house with an LLC can have many legal and financial benefits. Here’s how to buy a house with an LLC, as well as what to know before doing it.

You can work directly with a financial advisor to help you choose the best tax route for your business that will have a positive impact on your personal taxes. 

The Basics of Buying a House With an LLC

LLCs are used for real estate because they protect the property owner from a lawsuit. For instance, if you form an LLC to own your rental properties, if there’s an issue and a tenant sues, they won’t be suing you. They’ll be suing the LLC, leaving your name out of it. There are also some tax benefits to owning a property with an LLC, depending on the type of LLC.

To start buying a house with an LLC, you need an LLC. If you don’t have one, you can research how to set one up in your state or hire a service to set one up for you. LLCs are governed by states, so each state will have different requirements and fees for setting one up.

Once you have an LLC set up, you will need to finance the purchase. Unfortunately, many mortgage lenders don’t give out mortgages to LLCs. LLCs are ineligible for many types of residential mortgages, such as FHA and conventional loans. Still, there is specific financing available for LLCs. It just may come with more costs associated.

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.  Also, before considering this option, talk to your mortgage lender. If the mortgage has a due-on-sale clause that would be triggered by the transfer, you would have to pay the full remaining mortgage.

The Benefits and Drawbacks of Using an LLC to Purchase 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.

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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. Several LLC structures have different benefits and costs associated with them.

Bottom Line

Now that you know the basics of how to buy a house with an LLC, you’ll see that it isn’t for everyone. There are a lot of costs associated with it, from setting up the LLC to financing the purchase. However, there are several benefits, such as maintaining your privacy and protecting yourself from lawsuits. You may lose some tax benefits, but depending on the LLC’s structure, you may gain some too. Before you try to buy a house with an LLC on your own, consult an accountant or a financial advisor.

Tips for Buying a Home

• A financial advisor can guide you through major financial decisions, like the purchase of a home. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Securing a mortgage can be a stressful and confusing process. For starters, you need to figure out what term is best for you, whether you want a fixed or variable interest rate and where to get the best mortgage rates.

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