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How to Put Your Rental Property Into an LLC

  • 5 days ago
  • 5 min read

Many physicians in our online communities for doctors are told that they should put their rental properties into an LLC, but find that the process is more complicated than they may have thought initially. The process of putting a rental property into an LLC differs based on whether the property is initially purchased through an LLC or transferred into one, but either way, it’s very important to make sure it’s done correctly to avoid voiding the asset protection offered by an LLC. Below, we’ll cover the process of getting a rental property into an LLC, as well as associated nuances. As always, consult with appropriate professionals familiar with the laws and policies in your region and with financing, as these can have important implications for your options.


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2 ways to put your rental property into an LLC: buying the property through the LLC and transferring the property into an LLC


Do you need an LLC for your rental property investment?


We have a separate article on whether you need an LLC for your investment property, but the long and short of it is that many physicians elect to have one for asset protection reasons, as well as to keep the business separate financially.



How do you put a rental property into an LLC?


The process and nuances of putting a rental property into an LLC differs depending on whether the property is initially acquired through an LLC, or whether it’s transferred to an LLC after purchase.


While the easy thing to say would be to always just purchase the property through the LLC, this may not be possible if:

  • You already own the property (for example, if this is a primary residence that you are converting to a rental property or if you inherit a property)

  • You need to purchase the property with a financing product or mortgage that doesn’t allow an LLC to be the owner


Many lenders will not lend to an LLC for residential properties, and this may be the option that gives you the best rate or financing option. It’s important to talk to a lender who’s familiar with investment properties to determine the best option for you, whether that’s a second home product, a commercial loan, a DSCR investor loan, or otherwise. Some lenders may allow you to do a mortgage for a residential loan but may require a personal guarantee.


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Buying a rental property directly into an LLC at the time of investment acquisition


This is the cleanest and easiest way to put a rental property into an LLC, assuming that the financing options will allow it. In this case, you will:

  • Form the LLC: You’ll have to create and register the entity with your state, get an EIN number, and open related business bank accounts

  • Use the LLC name on all related documents and transactions: It should be used on the purchase contract, the title, and the deed. 

  • Run everything going forward through the LLC: This includes rent payments, rental property related expenses, leases and other tenant agreements, insurance policies, etc.



Moving an existing rental property into an LLC


This process is unfortunately a lot more complicated, and will require careful attention to detail to not create complications that could void the protections offered to you by an LLC. Everything related to the property will have to now be in the LLC’s name, so you want to make sure you don’t leave anything out or skip any steps.



Ensure that it won’t cause an issue with your mortgage


Many people want to transfer the property into an LLC without informing the lender or involving them in the process. However, this could be a very large mistake. While many lenders don’t enforce a due-on-clause sale in this situation, they have the right to, as many lender contracts include this clause and transferring the rental property to an LLC could trigger it. A due-on-sale clause is a provision in the mortgage that requires that you pay back the full loan upon sale or transfer of a product, and is designed to ensure that people don’t assume lower interest loans that may no longer be advantageous to the lender at the time of a transfer.  


Ideally, your lender will be fine with this transfer, but you’ll want to talk it over with them if you’re worried about this.



Form the LLC


As in the previous section, you’ll create and register the entity with your state, get an EIN number, and open related business bank accounts.



Prepare the deed transfer, and record it appropriately


There are different types of deeds, but they will transfer the ownership from you to the LLC. You’ll need to file this with the appropriate office locally, and likely pay some associated fees.



Update all documentation, policies, contracts, accounts, etc.


Once the property has been transferred to the LLC, you’ll need to update everything that used to be under your name to the LLC’s name. This includes any tenant agreements, insurance policies, bank accounts, property tax or local records, or otherwise. 



Pay any applicable taxes, if necessary


Most of the time, you won’t trigger significant taxes because provided that you’re the sole owner of the LLC, your new LLC is a passthrough entity for the sake of your taxes. However, there could still be some tax implications to the transfer. For one, there may be state and local transfer taxes, and in some states, the transfer may trigger a reassessment of the property value for property tax purposes. 



Conclusion


Keeping your rental property in an LLC can introduce some complexity or logistics, but is generally thought of as a good asset protection strategy. It is important to make sure that this is done correctly to ensure that you can take advantage of the protections. As always, consult with appropriate expertise at all steps of the process, especially as state and local requirements and regulations may vary.



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