Turning Primary residence into an LLC

[Anass M.]

Hello BP,

I am a homeowner/investor here in Denver, CO. My partner and I bought a duplex last year using an FHA loan and are currently renting out the other unit as well as a room in our unit. We would like to push the current liability into an LLC so we could get another FHA loan or just free up our liability so we can make another next purchase. We are unsure if we can stick an FHA loan into LLC, or if we would need a different mortgage product (conventional) to achieve this goal.

1. Can you put an FHA loan into an LLC?
2. What kind of process is it getting a primary residence (conventional or FHA) into an LLC?
3. Are we being premature in creating an LLC and having future loan worries when we are successfully house hacking, have low debt and make relatively good incomes?

[Linda Weygant]

As long as you continue to live in the property, owning it in an LLC is problematic from both a legal standpoint (talk to an attorney) and a tax standpoint.

But some answers 

1. An FHA loan is a personal loan product. You can't just transfer the liability to the LLC. Your mortgage may have a Due on Sale/Transfer clause, meaning that if you change the title work on your property to an LLC, the mortgage becomes due and payable - in full - within 30 days.

2. You may be able to refinance the loan to the LLC, but this is a commercial product, not a personal product, so you'll very likely be at 80% LTV and a slightly higher interest rate.

3. Yes, in my opinion you are premature in creating an LLC while still living in the property. If both of you have ownership of the LLC, you're now in the process of having to file a separate tax return for the LLC. Additionally, you've got significant co-mingling of the LLC assets with personal since you're living in the LLC's main asset. An attorney should be consulted to find out for sure, but my gut hunch is that you receive very little or no liability protection from the LLC when you have that level of co-mingling.

Contrary to popular belief, there are zero tax benefits to owning a rental in an LLC vs owning it in your personal name.

Lastly, check with your lender, but I believe you can have more than one FHA product. Generally you must live in any home for at least a year to satisfy the FHA requirements. So unless you're moving into the next property, you likely won't be able to get an FHA loan on it. If you are moving into the next property, then you can have two FHA back loans and, after you are fully moved out of the prior home, you can consider transferring it to an LLC.