My husband and I are under contract on our first rental income property and wonder if anyone has switched it over from their personal name to an LLC right away? Or waited.
@Samantha Rodriguez I have rentals in my name as well as LLC. Just make sure you have adequate liability ins.
@Bjorn Ahlblad Did your property taxes go up about 3x once you switched to an LLC?
Great question about taxes Samantha. Following...
@Samantha Rodriguez I did not switch any over some I bought in my name others I bought in my LLC. I think the tax increases may be more State dependent, here in Washington the taxes are about the same either way at least for the three counties I invest in.
Similarly to Bjorn Ahlblad: I Purchased a triplex under an LLC; In MA the taxes were very similar. Currently, keep my other property ( duplex) I keep under my name as a primary residence while renting out the other unit.
@Samantha Rodriguez In my name with a $2M umbrella policy.
Bought it under my name but when I went to refinance, I had switched it to a LLC. The interest rate was 1/8th % higher and taxes remained the same.
@Samantha Rodriguez this is a common question whether to put a property in an LLC or not. There are lots of pros and cons. A search here should bring up a lot of thread on the subject.
You will find strong opinions on both sides. Study the options to figure out what is best for you. In general an LLC will cost you more to run and cost more to finance your properties. It will add some liability protection but this is by no means absolute protection. There can be many holes in the protection it offers you.
That said I don't know an attorney that would own properties in their own name.
All of my properties are in my name however they all have high liability policies, and I have a very large umbrella policy on me and my families head along with some good estate planning. My main business is incorporated and my other business is LLC.
In the end, corporate veils can be pierced all you can do is insure yourself and protect as best as possible.
I am an attorney and have my properties in my own name. I have them well insured and an umbrella policy. There is an excellent step by step post by an attorney- somewhere on here about how you must proceed in establishing an LLC and more importantly, operate under an LLC if you are to protect your assets. It is rigorous and necessitates the complete separation of personal and business affairs. That would add a cost factor, both monetary and time, that I am not willing to pay.
I believe the vast majority of LLC operators do it in a half assed fashion, commingling there business and personal. Be it credit card expenses, bank accounts or simply holding yourself out as the owner.
Additionally, in NJ, you “are to” retain counsel for all court hearings. That means a savvy tenant can delay an eviction or a matter in small claims court by notifying the court that you are not represented. This will become more of an issue as states provide counsel for evictions. If your tenant has an attorney you had better believe he will raise it.
Some believe it is a magic bullet against liability and they may not carry adequate insurance coverage. It is not and as others have said- insure yourself properly.
If you are going to go the LLC route, just know the duties and responsibilities that are required to insulate your company.
I would also add that my buildings are in an A neighborhood. If they were in a D I would go the LLC and be completely insulated - no one would know my name or face.
I own all of my properties in my own name. There are drawbacks to LLCs for small landlords and they do not offer all of the protections if they are single member LLCs.
Some of the other posters have already gone over some of the issues.
@Samantha Rodriguez we own property in our own name. As far as property taxes, it may vary by state, but I don't believe you will find any different property tax treatment whether held in your name or LLC. Taxes are usually higher for non-owner occupied but whether that is held in your personal name or LLC, it is really the same.
Even if you hold in your personal name, it is still a business. You basically follow the same rules and tax laws. The only difference on an LLC is there is additional paperwork you need to file. That could add some cost to your tax preparation, but doesn't really change your taxes.
As far as your first property, what type of financing are you doing? If you are doing a conventional mortgage, the mortgage contract may prohibit you from switching ownership into an LLC. Ask your lender.
As others stated, it can be fairly easy to pierce the corporate veil of an LLC. The simple fact that you purchased the property in your personal name on a personal mortgage, then switch it to an LLC could be enough to get past the LLC. You really want to purchase properties inside an LLC ideally. You will also need to setup business bank accounts in the LLC name and keep all expenses through that account. If you self manage, it can also complicate things.
It would be good to review your situation with your CPA and your attorney. Keep in mind that an attorney makes money setting up an LLC, so very often they will just suggest it whether it is needed or not.
Whatever you do, make sure you have a blanket liability policy with several million cap. And although this sounds obvious, run your property in a manner that reduces risks. Prioritize safety and avoid risks like swimming pools and trampolines.
I have 20 doors and none of them are in my name. I strongly encourage the use of a legal entity to provide the liability protection, the separation of book keeping and distance from your personal assets.
Purchasing in your name and immediately quit claiming to a legal entity at the same closing will suffice and keep the legal formalities of your business entity. Make sure to treat the business entity like a business. You will be fine.
Each property should have an insurance policy, and the business entity should have a general liability policy as well.
@Ned Carey I saw u said it wont give you absolute protection, i am new to REI and thought it did. Is there a better way to get protection or is the protection from an LLC enough?
@Samantha Rodriguez I have properties in LLC. Some I bought in my name and transferred and some I closed with LLC on title. I have a robust insurance policy on all as well. Costs a bit more but I sleep well at night cuddled up in my liability protection blanket. I don't think it affects taxes. They have gone up, but I've compared to the neighbors which are similar including owner occ properties. I've been able to contest the appraised value on my LLC successfully (sometimes).
As it relates to protecting yourself, make sure you require Renter's Insurance from all tenants. It's extremely cheap, offers several benefits to them, and is the first line of defense that is depleted in the event of an unfortunate and potentially litigious situation.
@Samantha Rodriguez I own in my name with good insurance and I have a $2MM umbrella. Works fine for me.
@Shonari Wynter you must have insurance LLC or not.
You are always responsible for you r own actions. If an employee runs over a little old lady crossing the street, while working for your LLC, both the employee and your LLC could be held liable. You personally should not be held liable (but they may try)
However if you drive over a little old lady crossing the street why doing work for you LLC both your LLC and You personally will be responsible. You were driving the vehicle that ran her over, so your are responsible.
Now expand that to a small company. You are the one doing all the work, so you could be responsible for most everything you do.
- Does and LLC replace insurance - NO
- Does an LLC give perfect protection - NO
- Would I put an investment property in my own name - NO
The fact is there is no such thing as perfect protection, however, an LLC will give you a bit of separation and asset protection. Yes, you must run you LLC as a business (not sure why you would invest in real estate and do anything else). All of the investors that I work with own property in the name of their LLC including myself.
A separate LLC for each property. Personal assets are held in an irrevocable trust. The usual and customary battery of insurance coverage.
For those of an age that are looking at LLC membership as a means to avoid Medicaid look-back issues....here's an informative article. https://www.trustedattorneys.c...
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