Transferring property to LLC

New to Real Estate · Aurora, CO · Member since 2023 · 6 posts · 3 votes

Hello, Bigger Pockets!!

It is with great joy that I announce that my wife, Piper, and I have closed on our first rental property! We bought a 2/1 in OH and have the property management company in place to get it rented ASAP. We also used a service to establish an LLC to own the property and I would love anyone's advice who has already accomplished the task of transferring ownership in preparation for proper tax filings next year. I would like to avoid any pitfalls, speed bumps, and hurdles that I can, or at least prepare myself properly for them in order to navigate them successfully if they cannot be avoided.

Thank you all for your experience, we are looking forward to hearing from you!

Michael and Piper Holmes (Newbies!!)

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Todd Hoffman

Real Estate Lender · Littleton, CO · Member since 2012 · 32 posts · 15 votes

Congratulations!

Here is a list of items to consider when transferring a title of rental property from individuals to an LLC (and I would advise consulting a good attorney with local knowledge, especially your first time if you are not a legal expert):

Title Insurance: Transferring the property may void your title insurance. Review the title insurance policy and contact your title insurance company about the planned transfer. The insurance company may be able to endorse the policy to ensure continued coverage.
Forming the LLC and bank accounts (From your post, I think you did this one): Establish an LLC. This process varies by state but typically involves choosing a name, filing articles of organization, creating an operating agreement, and paying filing fees. You will also likely need to establish a bank account to ensure you can conduct business through the LLC without piercing the veil (and taking on personal liability).
Prepare a Deed to Transfer Property: Depending on the state (I think Ohio allows both), you may use a quitclaim deed or a warranty deed. Quitclaim deeds are commonly used when the property is transferred without a traditional sale, like to an LLC.
Filing the Deed: Once the deed is prepared and executed, you need to file it with the appropriate county recorder's office. A transfer tax might be involved, although the amount varies widely by locality.
Compliance with State Laws: Different states have different rules and requirements regarding property transfers, so it's important to research or consult a legal professional knowledgeable about the law affecting your property.
Local Rental Rule Considerations: Some towns and cities may have laws regarding rental licensing, registration, or permission. Some may require landlord licenses (or registration). Some, and more common for short-term rentals, may have restrictions making it hard or impossible to re-establish permission after a transfer. Again research and consult before acting.
Tax Considerations: Transferring property can trigger a "reassessment" of its value for property tax purposes.
Avoiding the 'Due-on-sale' Clause: Most mortgages have a due-on-sale clause, which allows the lender to demand full repayment upon the transfer of property. Transferring property to an LLC might trigger this clause (consult your loan documents and possibly your lender).
Hazard/Liability Insurance: You will need to update or change your property insurance policy. Just to remind you, a regular homeowner's policy generally does not cover rental properties owned. While transferring property to an LLC can offer liability protection, it is not a substitute for good insurance. Obtain good liability insurance (some liability coverage can often be included with the landlord or commercial policy).
Updating Lease Agreements: If you have tenants in the property, you'll need to update the lease agreements to reflect the new ownership by the LLC.
Planning: Assess the overall costs and plan the order to do the items.

Finally, while this list covers several points, it is not exhaustive, and the complexity of the real estate and tax laws means there may be other issues and considerations. Thus, consulting with a real estate attorney and possibly a tax advisor (depending on the attorney’s depth and scope of knowledge) is recommended to understand all potential legal and financial implications before making such a transfer.

I hope the above content (the “Content”) is helpful. It is intended for educational and entertainment purposes only. I am neither an attorney nor a legal or tax expert. The Content is provided “as is” and should be considered potentially flawed personal opinion without warranties and may not be complete, accurate, appropriate, or applicable to all circumstances. It is not a substitute for professional advice; before making decisions based on the Content, you should consult knowledgeable professionals about your specific circumstances. You should not rely on the Content.

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Ben Einspahr
House Hacking Specialist · Denver, CO · Member since 2016 · 411 posts · 396 votes
3y
@Pichael Miper Holmes congrats on the new purchase! I just finished going through this same process putting a rental (former primary) under an LLC.
I would connect your lawyer that drafted LLC operating agreement for you and ask them to file a quit claim deed with the county. They will need copy of deed from title company and county property is located in.
After you have done that, be sure details have been communicated with insurance (add LLC as additionally insured).
Also if you have not already, make sure you have separate business checking account for all transactions.
We just recently recorded a webinar called, should I put my house hack into an LLC. Even though this is not a house hack, there is still info in there you can apply to your business. Happy to send the details.
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Todd Hoffman
Real Estate Lender · Littleton, CO · Member since 2012 · 32 posts · 15 votes
3y
Congratulations!

Here is a list of items to consider when transferring a title of rental property from individuals to an LLC (and I would advise consulting a good attorney with local knowledge, especially your first time if you are not a legal expert):
- Title Insurance: Transferring the property may void your title insurance. Review the title insurance policy and contact your title insurance company about the planned transfer. The insurance company may be able to endorse the policy to ensure continued coverage.
- Forming the LLC and bank accounts (From your post, I think you did this one): Establish an LLC. This process varies by state but typically involves choosing a name, filing articles of organization, creating an operating agreement, and paying filing fees. You will also likely need to establish a bank account to ensure you can conduct business through the LLC without piercing the veil (and taking on personal liability).
- Prepare a Deed to Transfer Property: Depending on the state (I think Ohio allows both), you may use a quitclaim deed or a warranty deed. Quitclaim deeds are commonly used when the property is transferred without a traditional sale, like to an LLC.
- Filing the Deed: Once the deed is prepared and executed, you need to file it with the appropriate county recorder's office. A transfer tax might be involved, although the amount varies widely by locality.
- Compliance with State Laws: Different states have different rules and requirements regarding property transfers, so it's important to research or consult a legal professional knowledgeable about the law affecting your property.
- Local Rental Rule Considerations: Some towns and cities may have laws regarding rental licensing, registration, or permission. Some may require landlord licenses (or registration). Some, and more common for short-term rentals, may have restrictions making it hard or impossible to re-establish permission after a transfer. Again research and consult before acting.
- Tax Considerations: Transferring property can trigger a "reassessment" of its value for property tax purposes.
- Avoiding the 'Due-on-sale' Clause: Most mortgages have a due-on-sale clause, which allows the lender to demand full repayment upon the transfer of property. Transferring property to an LLC might trigger this clause (consult your loan documents and possibly your lender).
- Hazard/Liability Insurance: You will need to update or change your property insurance policy. Just to remind you, a regular homeowner's policy generally does not cover rental properties owned. While transferring property to an LLC can offer liability protection, it is not a substitute for good insurance. Obtain good liability insurance (some liability coverage can often be included with the landlord or commercial policy).
- Updating Lease Agreements: If you have tenants in the property, you'll need to update the lease agreements to reflect the new ownership by the LLC.
- Planning: Assess the overall costs and plan the order to do the items.
Finally, while this list covers several points, it is not exhaustive, and the complexity of the real estate and tax laws means there may be other issues and considerations. Thus, consulting with a real estate attorney and possibly a tax advisor (depending on the attorney’s depth and scope of knowledge) is recommended to understand all potential legal and financial implications before making such a transfer.

I hope the above content (the “Content”) is helpful. It is intended for educational and entertainment purposes only. I am neither an attorney nor a legal or tax expert. The Content is provided “as is” and should be considered potentially flawed personal opinion without warranties and may not be complete, accurate, appropriate, or applicable to all circumstances. It is not a substitute for professional advice; before making decisions based on the Content, you should consult knowledgeable professionals about your specific circumstances. You should not rely on the Content.
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Pichael Miper HolmesPro Member
OP
New to Real Estate · Aurora, CO · Member since 2023 · 6 posts · 3 votes
3y
Thank you, @Todd Hoffman and @Ben Einspahr!
That was where my thinking was, and you both clarified the steps for us. This community is fantastic.

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Todd Hoffman
Real Estate Lender · Littleton, CO · Member since 2012 · 32 posts · 15 votes
3y
Glad you found it helpful. There were a few assumptions I made that were not stated in that post.

I assumed that you and your spouse own the property together and you file income taxes jointly, and that the LLC is a disregarded entity (essentially, the IRS sees a "disregarded entity" as not separate from its owner(s) for tax purposes, even though it might be legally separate from the owner(s). On an IRS 1040 Tax return, a disregarded entity income filing is usually in Schedule C as opposed to a separate income tax filing for the business).

If you (and your spouse) are transferring ownership to an LLC, and the LLC is not a disregarded entity for you and your spouse, or there are other ownership differences, there may be additional considerations. There could be gifting tax considerations and/or capital gains considerations, and potentially other tax considerations.

More reasons to research thoroughly and/or consult experts before acting.

Note: Even if an LLC is disregarded for federal income tax purposes and you don't file separate IRS income tax filings for the LLC (i.e., in your personal IRS filing Schedule C), the LLC may still be required to file separate state tax returns, employment tax returns, or information returns like Form 1099, depending on the circumstances.
I hope the above content (the “Content”) is helpful. It is intended for educational and entertainment purposes only. I am neither an attorney nor a legal or tax expert. The Content is provided “as is” and should be considered potentially flawed personal opinion without warranties and may not be complete, accurate, appropriate, or applicable to all circumstances. It is not a substitute for professional advice; before making decisions based on the Content, you should consult knowledgeable professionals about your specific circumstances. You should not rely on the Content.

0 Reply
Scott DuVall
Member since 2023 · 1 post · 1 vote
3y
Quote from @Todd Hoffman:
Congratulations!

Here is a list of items to consider when transferring a title of rental property from individuals to an LLC (and I would advise consulting a good attorney with local knowledge, especially your first time if you are not a legal expert):

Title Insurance: Transferring the property may void your title insurance. Review the title insurance policy and contact your title insurance company about the planned transfer. The insurance company may be able to endorse the policy to ensure continued coverage.
Forming the LLC and bank accounts (From your post, I think you did this one): Establish an LLC. This process varies by state but typically involves choosing a name, filing articles of organization, creating an operating agreement, and paying filing fees. You will also likely need to establish a bank account to ensure you can conduct business through the LLC without piercing the veil (and taking on personal liability).
Prepare a Deed to Transfer Property: Depending on the state (I think Ohio allows both), you may use a quitclaim deed or a warranty deed. Quitclaim deeds are commonly used when the property is transferred without a traditional sale, like to an LLC.
Filing the Deed: Once the deed is prepared and executed, you need to file it with the appropriate county recorder's office. A transfer tax might be involved, although the amount varies widely by locality.
Compliance with State Laws: Different states have different rules and requirements regarding property transfers, so it's important to research or consult a legal professional knowledgeable about the law affecting your property.
Local Rental Rule Considerations: Some towns and cities may have laws regarding rental licensing, registration, or permission. Some may require landlord licenses (or registration). Some, and more common for short-term rentals, may have restrictions making it hard or impossible to re-establish permission after a transfer. Again research and consult before acting.
Tax Considerations: Transferring property can trigger a "reassessment" of its value for property tax purposes.
Avoiding the 'Due-on-sale' Clause: Most mortgages have a due-on-sale clause, which allows the lender to demand full repayment upon the transfer of property. Transferring property to an LLC might trigger this clause (consult your loan documents and possibly your lender).
Hazard/Liability Insurance: You will need to update or change your property insurance policy. Just to remind you, a regular homeowner's policy generally does not cover rental properties owned. While transferring property to an LLC can offer liability protection, it is not a substitute for good insurance. Obtain good liability insurance (some liability coverage can often be included with the landlord or commercial policy).
Updating Lease Agreements: If you have tenants in the property, you'll need to update the lease agreements to reflect the new ownership by the LLC.
Planning: Assess the overall costs and plan the order to do the items.

Finally, while this list covers several points, it is not exhaustive, and the complexity of the real estate and tax laws means there may be other issues and considerations. Thus, consulting with a real estate attorney and possibly a tax advisor (depending on the attorney’s depth and scope of knowledge) is recommended to understand all potential legal and financial implications before making such a transfer.

I hope the above content (the “Content”) is helpful. It is intended for educational and entertainment purposes only. I am neither an attorney nor a legal or tax expert. The Content is provided “as is” and should be considered potentially flawed personal opinion without warranties and may not be complete, accurate, appropriate, or applicable to all circumstances. It is not a substitute for professional advice; before making decisions based on the Content, you should consult knowledgeable professionals about your specific circumstances. You should not rely on the Content.
Great post. What advice do you have as far as avoiding the "Due-on-sale" clause common with many lenders that don't like the property being deeded to an LLC when the LLC wasn't used to qualify for the loan?
1 Reply
Todd Hoffman
Real Estate Lender · Littleton, CO · Member since 2012 · 32 posts · 15 votes
3y
@Scott DuVall, your question about avoiding the "due-on-sale" clause when transferring a rental property title to a disregarded LLC is a good one. If possible, the best approach would be to set up the LLC before purchasing the property, thus avoiding the issue altogether. However, if that's not an option, navigating this situation can be complex and nuanced.
I am not aware of any silver bullets to avoid the Due-on-sale clause. I would welcome a legal expert's advice on this.

To the extent possible, negotiate with your lender or noteholder to allow the transfer. Keep in mind that getting their written consent is crucial to avoid any future complications. Some lenders may be reluctant to allow this transfer as they prefer to have the borrowers still on the title for ease of loan resale.

If you can't secure the lender's permission, there are several factors you should consider, though this list isn't exhaustive:
· Refinance:

o What are the costs and interest rates of a new loan with the LLC as the titleholder?

o Can you refinance the loan through a line of credit or by using other assets as collateral?

o Is there a prepayment penalty on the current loan?

· Likelihood of the loan will be called due if you transfer without written consent:

o Has the loan been sold, or will it be sold in the future?

o Have the interest rates increased, or are they likely to increase? Lenders may be more inclined to call the loan due if they can re-lend the money at higher rates.

o Noteholder’s past behavior and plans. And keep in mind that the Noteholder could sell the loan, and it is hard to know what a future Noteholder may do.

o Consider the noteholder's situation. For example, banks with liquidity issues might be more likely to call the loan due.

· Other impacts of violating the loan agreements:

o Transferring the property without the lender's permission may breach your loan agreement, which could have legal consequences beyond just the acceleration of the loan.

· Evaluate your personal situation:

o Are there any upcoming life events (like selling another property with significant equity) that might make loan acceleration manageable?

o Again, prepayment penalties may play a role

· No Transfer:

o If you don’t do the transfer, what are the risks and costs, and can they be mitigated?
Remember, trying to avoid the due-on-sale clause without the lender's consent can lead to significant risks, including potential foreclosure if you're unable to repay the loan in full once it's called due.

I highly recommend researching thoroughly and/or consulting experts before acting.

I hope the above content (the “Content”) is helpful. It is intended for educational and entertainment purposes only. I am neither an attorney nor a legal or tax expert. The Content is provided “as is” and should be considered potentially flawed personal opinion without warranties and may not be complete, accurate, appropriate, or applicable to all circumstances. It is not a substitute for professional advice; before making decisions based on the Content, you should consult knowledgeable professionals about your specific circumstances. You should not rely on the Content.
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