Switching Rental Property from Personal to LLC?

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Switching Rental Property from Personal to LLC?

Patrick Rafferty
Rental Property Investor · Manasquan · Member since 2015 · 8 posts · 3 votes

Seeking help/advice for what the title suggest. Reading and seeing a lot of pros & cons for moving my rental property to an LLC, getting stuck with what I should do.

For context, I purchased a townhome in my personal name in 2020, began renting it in 2021 and it has been rented out since. Property is located in NJ. Purchased at $166k, present comps at $285k

I am on the market for my next property, which is why I'm looking at forming an LLC for the original rental. I was advised that for owning a single property, isn't cost effective to have it in an LLC.

- Worried that, should I move to an LLC, my mortgage may be called to be paid in full by my company

- Does this disqualify me from a 1031 in the future?

- Am I able to do a mortgage assumption from personal to the LLC to avoid the balance being called and effectively keep the interest rate? (My mortgage does allow it)

- Does transferring the property bring any capital gains into effect due to the rise in value?

- Overall tax structure being more complicated

There's plenty more "What if's" out there, but I believe these are my main concerns. 4 years in and still a rookie.

Any advice and knowledge from personal experience is welcome. Leaning towards the LLC, just want to make sure I do it right. Thank you

1Reply
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Most Popular Reply

Account Closed
Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
2y

We highly recommend to our clients they use some form of asset protection. See our "tier list" below: 

Worst:

– No coverage, held in your name.

Bad:

  • Relying on insurance. This is the most basic level of protection and it is not very effective, but it is still better than nothing. Insurance companies have many exclusions and they may not cover everything, but they can help to pay for some of the costs of a lawsuit.

Good:

  • Using one LLC for all of your rental properties. This is better than relying on insurance because it protects your personal assets from liability. However, if someone sues you and wins, they could take all of your rental properties.

Better:

  • Using a separate LLC for each rental property. This is the best level of protection because it isolates each property from the others. If someone sues you and wins, they can only take the LLC that owns the property that was involved in the lawsuit.

Best:

  • Using a combination of LLC and land trust to protect your rental properties. These are more complex legal structures that can provide even more protection than a traditional LLC alone.

Here are some of the key things to keep in mind when choosing an asset protection strategy for your rental properties:

  • Your risk tolerance: If you are not very worried about being sued, you may not need the best level of protection. However, if you are worried about being sued, you should use the best level of protection that you can afford.
  • Your state laws: The laws governing asset protection vary from state to state. You should consult with an attorney in your state to make sure that you are using the best asset protection strategy for your situation.
  • Your budget: The cost of asset protection can vary depending on the type of protection that you choose. You should make sure that you can afford the cost of the protection that you choose.

    Please also keep in mind for your situation to consult a professional and share more details! 
7Reply
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17 Replies

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  • Matthew Hanna
    Member since 2023 · 1 post · 1 vote
    2y

    First and foremost I would recommend to start with the servicer of your mortgage to see about the transfer as well as an assumption. 
    most servicers won’t allow the switch-a-roo considering the liability is currently tied to you. 

    Best of luck! 


    1Reply
  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    2y

    I have properties in LLC and others in my name. Just make sure you have liability insurance in both cases. This question gets asked daily so do a search.

    0Reply
  • Account Closed
    Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
    2y
    Quote from @Patrick Rafferty:

    Seeking help/advice for what the title suggest. Reading and seeing a lot of pros & cons for moving my rental property to an LLC, getting stuck with what I should do.

    For context, I purchased a townhome in my personal name in 2020, began renting it in 2021 and it has been rented out since. Property is located in NJ. Purchased at $166k, present comps at $285k

    I am on the market for my next property, which is why I'm looking at forming an LLC for the original rental. I was advised that for owning a single property, isn't cost effective to have it in an LLC.

    - Worried that, should I move to an LLC, my mortgage may be called to be paid in full by my company

    - Does this disqualify me from a 1031 in the future?

    - Am I able to do a mortgage assumption from personal to the LLC to avoid the balance being called and effectively keep the interest rate? (My mortgage does allow it)

    - Does transferring the property bring any capital gains into effect due to the rise in value?

    - Overall tax structure being more complicated

    There's plenty more "What if's" out there, but I believe these are my main concerns. 4 years in and still a rookie.

    Any advice and knowledge from personal experience is welcome. Leaning towards the LLC, just want to make sure I do it right. Thank you

    The question is, what do you think an LLC will do for you?
    It doesn't provide protection unless you have an Operating Agreement that you actually follow. It doesn't provide any tax advantage.

    One good reason to have a property in an LLC is when it is set up properly and it's maintained properly and it's treated as a business and has substantial assets in it.

    A good umbrella policy often provides the same protection and is cheaper and easier to have.

    2Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    2y

    @Patrick Rafferty, Any tax paying entity can do a 1031 exchange. However, the entity (tax payer) that sells the property has to be the entity (tax payer) that buys the new property. So be careful that an LLC you set up will either have a track record so lenders will lend to it. Or use an LLC that is a disregarded entity (you are the only member and it does not file a tax return).

    The 1031 Investor5137 Reviews
    WebsiteView Page
    0Reply
  • Stephen Ferland
    Member since 2019 · 2 posts · 1 vote
    2y

    Hello Patrick, I've been exploring the idea of transferring my properties to an LLC to enhance liability protection. However, I've learned that this transfer might activate any due-on-sale clause especially in this market. If I were you I would reach out to the mortgage holder to get permission to transfer the property to the LLC without triggering the clause.

    1Reply
  • Account Closed
    Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
    2y

    We highly recommend to our clients they use some form of asset protection. See our "tier list" below: 

    Worst:

    – No coverage, held in your name.

    Bad:

    • Relying on insurance. This is the most basic level of protection and it is not very effective, but it is still better than nothing. Insurance companies have many exclusions and they may not cover everything, but they can help to pay for some of the costs of a lawsuit.

    Good:

    • Using one LLC for all of your rental properties. This is better than relying on insurance because it protects your personal assets from liability. However, if someone sues you and wins, they could take all of your rental properties.

    Better:

    • Using a separate LLC for each rental property. This is the best level of protection because it isolates each property from the others. If someone sues you and wins, they can only take the LLC that owns the property that was involved in the lawsuit.

    Best:

    • Using a combination of LLC and land trust to protect your rental properties. These are more complex legal structures that can provide even more protection than a traditional LLC alone.

    Here are some of the key things to keep in mind when choosing an asset protection strategy for your rental properties:

    • Your risk tolerance: If you are not very worried about being sued, you may not need the best level of protection. However, if you are worried about being sued, you should use the best level of protection that you can afford.
    • Your state laws: The laws governing asset protection vary from state to state. You should consult with an attorney in your state to make sure that you are using the best asset protection strategy for your situation.
    • Your budget: The cost of asset protection can vary depending on the type of protection that you choose. You should make sure that you can afford the cost of the protection that you choose.

      Please also keep in mind for your situation to consult a professional and share more details! 
    7Reply
  • Todd Jones
    Member since 2023 · 243 posts · 199 votes
    2y
    Quote from @Account Closed:

    We highly recommend to our clients they use some form of asset protection. See our "tier list" below: 

    Worst:

    – No coverage, held in your name.

    Bad:

    • Relying on insurance. This is the most basic level of protection and it is not very effective, but it is still better than nothing. Insurance companies have many exclusions and they may not cover everything, but they can help to pay for some of the costs of a lawsuit.

    Good:

    • Using one LLC for all of your rental properties. This is better than relying on insurance because it protects your personal assets from liability. However, if someone sues you and wins, they could take all of your rental properties.

    Better:

    • Using a separate LLC for each rental property. This is the best level of protection because it isolates each property from the others. If someone sues you and wins, they can only take the LLC that owns the property that was involved in the lawsuit.

    Best:

    • Using a combination of LLC and land trust to protect your rental properties. These are more complex legal structures that can provide even more protection than a traditional LLC alone.

    Here are some of the key things to keep in mind when choosing an asset protection strategy for your rental properties:

    • Your risk tolerance: If you are not very worried about being sued, you may not need the best level of protection. However, if you are worried about being sued, you should use the best level of protection that you can afford.
    • Your state laws: The laws governing asset protection vary from state to state. You should consult with an attorney in your state to make sure that you are using the best asset protection strategy for your situation.
    • Your budget: The cost of asset protection can vary depending on the type of protection that you choose. You should make sure that you can afford the cost of the protection that you choose.

      Please also keep in mind for your situation to consult a professional and share more details! 
    Excellent advice!

    On YouTube, Clint Coons really pushes a setting up a Wyoming LLC then have it own several LLCs as Wyoming has better anonymity laws. T tenants won’t be able to trace back to you owning the property.
    1Reply
  • Mark S.
    Real Estate Investor · Saint Paul, MN · Member since 2017 · 543 posts · 474 votes
    2y

    @Zachary Jensen Tell me about the ‘many exclusions’. Sure, gross negligence by the owner may create some, but that can be easily managed. And insurance companies have teams of experienced attorneys defending any claims. Do you have any examples where a landlords was successfully sued and his/her liability insurance would not pay? I am curious.

    1Reply
  • Patrick Rafferty
    OP
    Rental Property Investor · Manasquan · Member since 2015 · 8 posts · 3 votes
    2y
    Quote from @Matthew Hanna:

    First and foremost I would recommend to start with the servicer of your mortgage to see about the transfer as well as an assumption. 
    most servicers won’t allow the switch-a-roo considering the liability is currently tied to you. 

    Best of luck! 



     Thank you for the input! Due for a call to them, their customer service has been pretty rough

    0Reply
  • Patrick Rafferty
    OP
    Rental Property Investor · Manasquan · Member since 2015 · 8 posts · 3 votes
    2y
    Quote from @Dave Foster:

    @Patrick Rafferty, Any tax paying entity can do a 1031 exchange. However, the entity (tax payer) that sells the property has to be the entity (tax payer) that buys the new property. So be careful that an LLC you set up will either have a track record so lenders will lend to it. Or use an LLC that is a disregarded entity (you are the only member and it does not file a tax return).

     Thank you @Dave Foster, appreciate the clarity

    1Reply
  • Patrick Rafferty
    OP
    Rental Property Investor · Manasquan · Member since 2015 · 8 posts · 3 votes
    2y
    Quote from @Bjorn Ahlblad:

    I have properties in LLC and others in my name. Just make sure you have liability insurance in both cases. This question gets asked daily so do a search.


     Thank you

    0Reply
  • Patrick Rafferty
    OP
    Rental Property Investor · Manasquan · Member since 2015 · 8 posts · 3 votes
    2y
    Quote from @Account Closed:

    We highly recommend to our clients they use some form of asset protection. See our "tier list" below: 

    Worst:

    – No coverage, held in your name.

    Bad:

    • Relying on insurance. This is the most basic level of protection and it is not very effective, but it is still better than nothing. Insurance companies have many exclusions and they may not cover everything, but they can help to pay for some of the costs of a lawsuit.

    Good:

    • Using one LLC for all of your rental properties. This is better than relying on insurance because it protects your personal assets from liability. However, if someone sues you and wins, they could take all of your rental properties.

    Better:

    • Using a separate LLC for each rental property. This is the best level of protection because it isolates each property from the others. If someone sues you and wins, they can only take the LLC that owns the property that was involved in the lawsuit.

    Best:

    • Using a combination of LLC and land trust to protect your rental properties. These are more complex legal structures that can provide even more protection than a traditional LLC alone.

    Here are some of the key things to keep in mind when choosing an asset protection strategy for your rental properties:

    • Your risk tolerance: If you are not very worried about being sued, you may not need the best level of protection. However, if you are worried about being sued, you should use the best level of protection that you can afford.
    • Your state laws: The laws governing asset protection vary from state to state. You should consult with an attorney in your state to make sure that you are using the best asset protection strategy for your situation.
    • Your budget: The cost of asset protection can vary depending on the type of protection that you choose. You should make sure that you can afford the cost of the protection that you choose.

      Please also keep in mind for your situation to consult a professional and share more details! 

     This is great, thank you @Account Closed

    0Reply
  • Account Closed
    Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
    2y
    Quote from @Mark S.:

    @Zachary Jensen Tell me about the ‘many exclusions’. Sure, gross negligence by the owner may create some, but that can be easily managed. And insurance companies have teams of experienced attorneys defending any claims. Do you have any examples where a landlords was successfully sued and his/her liability insurance would not pay? I am curious.

    Hey Mark, This scenario you describe has not happened in our firm with any of our clients yet, but I have heard from other accountants that it has happened before. This is due to folks getting policies with specific clauses absolving the liability of the insurance company getting triggered. Our logic is why give them a chance. When its your lawyer against an army of insurance company lawyers that do this all day, best to not even get into that fight to begin with and do some simple extra protection. 

    0Reply
  • Mark S.
    Real Estate Investor · Saint Paul, MN · Member since 2017 · 543 posts · 474 votes
    2y

    @Zachary Jensen I’ve never been able to find anyone who could provide a concrete example of that happening. I suppose if someone just had a traditional homeowners and umbrella policy there could be exclusions for rentals, but any decent agent can find a policy package designed for rentals. In that case, if the owner is sued he will have that ‘army of lawyers’ working for him, not against him. IMO, that should be the first line of protection for any owner. And as I said, no one has been able to provide an example where the proper insurance overage didn’t take care of the issue, other than gross negligence.

    0Reply
  • Account Closed
    Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
    2y
    Quote from @Mark S.:

    @Zachary Jensen I’ve never been able to find anyone who could provide a concrete example of that happening. I suppose if someone just had a traditional homeowners and umbrella policy there could be exclusions for rentals, but any decent agent can find a policy package designed for rentals. In that case, if the owner is sued he will have that ‘army of lawyers’ working for him, not against him. IMO, that should be the first line of protection for any owner. And as I said, no one has been able to provide an example where the proper insurance overage didn’t take care of the issue, other than gross negligence.


     That is a good point, transparently I cant think of one off the top of my head. Ill have to ask around the office today. Gross negligence often comes in the form of folks just not understanding fully their policy and most are not going to hire a lawyer to read over the insurance policy hence we like doing the additional asset protection.

    0Reply
  • John Mocker
    Insurance Agent · Norwalk, CT · Member since 2016 · 2k+ posts · 1k+ votes
    2y

    Patrick,

    Regardless of what you decide on the LLC, have your agent price Umbrella coverage from $1mm to $5mm. If an underlying policy, (ie. auto, home, boat or rental dwelling ...) has its limits exhausted by a covered loss, the umbrella will start paying at that point.

    By increasing the limits of coverage, you make less likely that a claimant would go after your other assets.  If you have $300,000 of underlyng coverage and $2mm of umbrella coverage, a judgement would have to exceed $2,300,000 before they would be seeking to go after other assets.  That does not mean it would not happen but it makes it less likely. 

    0Reply
  • Joe Nguyen
    Investor · VA, TX · Member since 2021 · 37 posts · 9 votes
    2y
    Quote from @Account Closed:

    We highly recommend to our clients they use some form of asset protection. See our "tier list" below: 

    Worst:

    – No coverage, held in your name.

    Bad:

    • Relying on insurance. This is the most basic level of protection and it is not very effective, but it is still better than nothing. Insurance companies have many exclusions and they may not cover everything, but they can help to pay for some of the costs of a lawsuit.

    Good:

    • Using one LLC for all of your rental properties. This is better than relying on insurance because it protects your personal assets from liability. However, if someone sues you and wins, they could take all of your rental properties.

    Better:

    • Using a separate LLC for each rental property. This is the best level of protection because it isolates each property from the others. If someone sues you and wins, they can only take the LLC that owns the property that was involved in the lawsuit.

    Best:

    • Using a combination of LLC and land trust to protect your rental properties. These are more complex legal structures that can provide even more protection than a traditional LLC alone.

    Here are some of the key things to keep in mind when choosing an asset protection strategy for your rental properties:

    • Your risk tolerance: If you are not very worried about being sued, you may not need the best level of protection. However, if you are worried about being sued, you should use the best level of protection that you can afford.
    • Your state laws: The laws governing asset protection vary from state to state. You should consult with an attorney in your state to make sure that you are using the best asset protection strategy for your situation.
    • Your budget: The cost of asset protection can vary depending on the type of protection that you choose. You should make sure that you can afford the cost of the protection that you choose.

      Please also keep in mind for your situation to consult a professional and share more details! 

    Hey @Zachary Jensen, this is excellent! Thank you for the breaking. I'm too currently curious on how one would go about telling their lender that they're switching from personal (name on deed) to an LLC? Have you had clients that having a lot of issues switching? Thanks.

    0Reply
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