Whether you want to buy a house to live in or for investment reasons, you may wonder if you can do the transaction through an LLC, or limited liability company, rather than under your name. You can, but it is not easy — and the reason for your purchase is one of the main drivers in determining whether it is a good idea. Let's take a closer look at the pros, cons, and complexities of buying a house with an LLC.

What Is An LLC?

LLC stands for limited liability company . It’s a corporate structure type allowing individuals and certain entities to come together as a business. The owners are known as members; there can also be just one owner called a single-member LLC. Members of a new LLC can include corporations, foreign entities, individuals, and pre-existing LLCs. There are various regulations concerning LLCs both at the federal and state level, and forming one requires compliance with strict requirements.

What Are The Advantages Of Buying A House Through An LLC?

With an LLC, you can take advantage of many benefits and advantages. In addition to increased privacy and limited liability, there are tax benefits and partnership opportunities. Purchasing a home with an LLC also allows you to maintain a separation between your personal and professional lives. Let's look in more detail at each of these advantages.

Privacy

As a business owner, you may find the privacy of the LLC structure appealing when you buy a home through an LLC. Buying a house under an LLC ensures that the company's name, not the names of the owners, appears on public documents and disclosures. In other words, LLCs allow you to hide your identity and personal information by replacing your name with a corporate name.

Limited Liability

The concept of limited liability refers to the fact that the owner is not personally liable for the company's debts and liabilities. Therefore, if you fear lawsuits as a business owner or real estate investor, you may find the LLC structure enticing. The limited liability structure does, however, have limitations.

For instance, occupying a home owned by an LLC can " pierce the corporate veil ." This legal term means that the shareholders, owners, or members of a corporation or LLC can become responsible for corporate damages as if the LLC structure never existed.

Tax Benefits

The LLC structure can provide substantial tax benefits, especially since it eliminates double taxation. Double taxation refers to profits taxed at the business level and then at the personal level. Instead, LLCs enjoy a pass-through tax structure, which means that the company pays taxes on profits, but the owner of the LLC does not. However, LLC owners must pay taxes on the profits allocated to them.

Easier To Invest With Partners

The LLC structure makes investing with friends or business partners easier – even with other investors who don’t know the LLC’s principal owner.

For example, two people can form an LLC together. A second member can easily join a single-member LLC and create a multiple-member LLC.

It is also easy to sell LLC shares. Selling shares of an existing partner to a new partner is the simplest way to handle this. In this process, an LLC must distribute 100% of its shares to its members.

Note that this does not imply that unrelated people interested in buying a home together need to consider LLCs. Without a valid business purpose, the structure will not be considered legal.

Keep Business And Personal Lives Separate

Many LLC owners prefer buying property through an LLC because it allows them to separate their property ownership from their personal lives. However, LLC owners who use their LLCs for personal expenses make it easier to pierce the corporate veil and disregard the corporation or LLC's separate existence should a lawsuit arise. Piercing the corporate veil can become problematic for LLCs of all sizes.

What Are The Disadvantages Of Buying A House Through An LLC?

It is also important to remember that there are significant disadvantages to buying a property through an LLC before doing so. Consider the initial and ongoing costs, the difficulty of obtaining a mortgage, the lack of preferential capital gain treatment, and a few other disadvantages.

Cost

Due to legal fees, setting up an LLC can be quite expensive. A significant part of the cost involves submitting your LLC's articles of organization, which can cost $40 – $500, depending on your state guidelines. You might also have to pay business licensing and permit fees.

Once your LLC is up and running, you may have to pay annual LLC taxes, annual reports, registered agent fees, and business license renewal fees.

When forming an LLC, you must get good legal advice before you do so.

Difficulty Getting A Mortgage

The most challenging part of attempting to buy a mortgage with an LLC structure is that residential lenders dislike lending to LLCs because of the limited liability it offers.

Banks are aware that LLC members and shareholders cannot be held responsible for the debts of the LLC or corporation. In this case, many lenders will only extend a mortgage loan to a small LLC or corporation if the owner is willing to pledge their assets as collateral.

You’ll Pay More

Attempting to buy a property with an LLC gives lenders an unequivocal tip-off that the owner has attempted to purchase the property for investment purposes rather than as a primary residence. Since a first mortgage takes priority, an investment property will take a backseat in the event of financial trouble.

As a result, this makes investment properties carry slightly higher interest rates than primary residences.

You Will Not Be Eligible For Most Types Of Residential Loans

If you want to buy a house with an LLC, you cannot use all types of residential loans. For example, you cannot get FHA loans with an LLC. In addition, you cannot get a conventional loan sold to Fannie Mae and Freddie Mac with an LLC.

As a first-time real estate investor who wants to buy a duplex or multiplex unit, consider taking advantage of the FHA ’s low-down payment options instead of setting up an LLC. Getting an LLC also means giving up certain tax perks. Income tax deductions are available for mortgage insurance on home loans.

You’ll Give Up Preferential Capital Gains Treatment

When you sell your house for more than you paid on it, you have to pay capital gains tax . It is normal to receive special treatment on capital gains tax when you buy a primary residence. You pay no capital gains tax on the first $250,000 profit as a single individual. Married couples are eligible for a $500,000 exemption. However, owning a property for investment purposes forfeits this treatment.

To qualify for the capital gains tax exemption, you must own the home for at least two years out of the five years preceding the sale. Additionally, you must have lived in the home as your primary residence for at least two years of the previous five years. It doesn’t have to be the same 2-year period.

Is It Possible To Transfer A Property You Already Own To An LLC?

Yes, it is possible to buy a property in your name and then transfer the title to the LLC later on, but there are a few factors to consider before doing so. In the case of a mortgaged home, the transfer of the title to an LLC could trigger the due-on-sale clause and the mortgage acceleration clause, requiring full repayment of the mortgage. Furthermore, the mortgage and/or owner’s title insurance policy may not be valid if the LLC does not fully belong to you. When transferring the title back and forth, you may also have to pay real estate transfer taxes depending on your location. In the end, it is best to discuss your plans with a tax advisor before making any decisions.

Who Should Consider Buying A House Through An LLC?

For first-time real estate investors, buying a house through an LLC offers far more cons than pros. More experienced investors hoping to make a career out of real estate investing could benefit from using this strategy to advance their businesses. In particular, skilled investors can own a lot of real estate which protects them from personal liability.

The Bottom Line: LLCs Are Great For Established Investors But Not So Great For New Investors

Establishing an LLC provides members with liability protection within their business entity. Your state government can give you an overview of the LLC laws in your state.

LLCs also offer privacy, limited liability, tax benefits, and partnership opportunities. However, be on the lookout for ongoing costs, difficulty getting a mortgage, disadvantages with capital gains treatment, and a few other cons.

First-time real estate investors may find it more advantageous to purchase property in their name because of the roadblocks and additional costs of buying a home through an LLC. Established investors should also proceed carefully. They should consult a business attorney to choose the best legal structure for their investments.

Don't forget that it's normal to feel analysis paralysis! To overcome indecision, consider applying for a mortgage in your name and working your way up to more complex investments.