"Selling" former primary residence to my LLC. Impossible?

Question

Within the past year I purchased a new home in the same metro area as my former primary residence (Charlotte, NC). I had every intention of selling that house and investing the cash in a multifamily property, however, MF properties are very difficult to find at the moment. Moreover, since this would be my first venture in REI, I've been thinking it might be better to start off smaller with something I already own free and clear. I've been told that lenders would probably not fund the sale of the home to an LLC owned by me. Any suggestions on how I can unlock 80% or more of the value of the home without "selling" and reap the same tax benefits as if I had sold?

Jonathan Styer · Answer

The answer is a cash out refi and quit claim to your LLC. This is a pretty standard practice in REI although may not be exactly kosher with your lender. You can pull out your cash and get your home into your LLC.

Let me ask you though, why do you want your SFH in an LLC? An umbrella policy is just as good and can cut out some of the headaches.

David M. · Answer

@Tim Speasl

So, you own the property now free and clear?  If so, the "cleanest" way to do this (as you are asking about using a LLC) in my layman's opinion is to establish the LLC and capitalize it with the property.  Then, apply for a commercial loan (legal entities are not eligible for a conforming residential loans).  Now, everything is under the name of the LLC.

If your objective for establishing the LLC is for asset protection, you really want everything under its name.  Having things split could/will cause trouble for you if you ever have a problem.  You need to look at protecting/maintaining your corporate veil.  The limited liability protection is only "good" for assets that they LLC controls which is one reason that having the mortgage held in your name isn't such a good idea.  The LLC, being a legal entity, has to be operated separate from yourself and not as your alter-ego.  If you keep buying properties in your personal name, getting a mortgage, then transferring Title, its starts looking like an alter-ego in my layman's opinion.  Look at it if it was too strangers doing this deal.  For example, would you really transfer transfer Title to me (with probably no other agreements/paper) and expect me to rent it out and send you the rent while paying for all the expenses?  Meanwhile, you are still holding onto the mortgage.  Its a subject-to purchase, effectively with no agreements.  Anyway, check some of my posts as I've posted on this ad nauseum.

Talk to a few qualified professional to make sure you are proceeding in a manner that you want.  Whether you should use a LLC wasn't your question.

To make sure i've answered your question, its not really a matter of selling the property to your LLC.  You are capitalizing the LLC with the property.  Use a refinance to get your equity out.  Its not entirely clear from your post what is your equity position in this property.

Good luck.

Tim Speasl · Answer

Thanks for your advice Jonathan & David.  My only previous experience with lenders is with mortgages on homes I've owned & occupied, not REI properties.  Refinancing seems to be the way to pull out most of the equity to free up and use for other deals.  I'll check with my lender if they would allow the quit claim in favor of the LLC.