Rental Property Investor · Tampa, FL · Member since 2016 · 208 posts · 96 votes
I "house hacked" my primary home without really knowing what that was. We currently have a renter in there but the house is still in my personal name. I have separate LLC's for my rental properties and for some reason never thought of personal asset protection for this one.
My question is, how do I go about converting this into a protected asset? Do I need to create and fund and LLC and sell it to myself? Can I simply transfer the title? Any advice?
I'm in North Carolina if that matters regarding state rules.
Rental Property Investor · Tampa, FL · Member since 2016 · 208 posts · 96 votes
5y
@Sarah Brown - ok to clarify, it's not my primary. I bought it as a primary 4 years ago but it's now exclusively a rental like the any other. The idea is would it make sense to get it out of my personal name into an entity, and then how to best do that?
In biggerpockets terms this is like a BRRRR or more so a house hack. I imagine investors don't stack their portfolios in their personal names and transfer ownership at some point.
I've done this a few times in a couple states. Once I moved out, an attorney helped me form an LLC and transfer ownership. I would imagine NC is the same, but consult an attorney to be sure. I'd be happy to chat about those experiences if you think it would be helpful.
Rental Property Investor · Tampa, FL · Member since 2016 · 208 posts · 96 votes
5y
Thanks @Chris Mills - I have a call into my attorney now. Was there any financial impact in the transfer? I'm wondering if the LLC doesn't actually buy the property, is the veil essentially punctured already with common funds?
Investor · Northern VA · Member since 2020 · 124 posts · 87 votes
5y
@Brian Orr Not really. My attorney drew up the state specific paperwork to do a deed transfer, which I got locally notarized and they filed for me. The legal costs from my attorney and the title company helping with the deed transfer were the main costs.
The existing note got paid from the LLC going forward with funds received from my property management company (or owner contribution initially). No common funds at any point. Never even late on a payment, much less missed one, so the bank never said a peep. My thinking is that they don't care unless and until there's a problem. If there is a problem in the future, you technically run the risk of them calling the note due in full. Most banks build that in to their loans. To my knowledge, no one has ever heard of that actually happening, or experienced it personally. Something to keep in mind though. You can always refi if you're concerned.
Rental Property Investor · Tampa, FL · Member since 2016 · 208 posts · 96 votes
5y
Thanks @Chris Mills - the concern on the fund mingling was essentially the legal concern about keeping the asset apart from personal funds. I hadn't thought about the bank payments specifically... So with what you've done, has your lawyer proposed that simply the deed transfer is enough to provide the legal protection in case of a lawsuit?
@Sarah Brown - ok to clarify, it's not my primary. I bought it as a primary 4 years ago but it's now exclusively a rental like the any other. The idea is would it make sense to get it out of my personal name into an entity, and then how to best do that?
In biggerpockets terms this is like a BRRRR or more so a house hack. I imagine investors don't stack their portfolios in their personal names and transfer ownership at some point.
This is what I do with mine. I buy them as owner occ, move in and fix them up, move out, turn it into a rental, and transfer title to an LLC. Keep in mind if you have a loan, the lender generally has a clause that says if you transfer title they can call the note due. They have never done that to me, but doesn't mean they can't. I have insurance covering both personal and LLC name.
Just a thought on the converting a primary residence to a Rental and then to a LLC. This is a great way to start the Rental property journey but there are some advantages and disadvantages as well. It's my understanding if you sell the house sometime over the next 5 years if it was still in your name and you can show you lived in it as your primary residence for 2 of those 5 years you would not pay Capital Gains Tax on the appreciation of the house. But once you convert it to the LLC you instantly loss that potential benefit.
Everything will depend on your long term plan for the property. Consult your attorney or CPA for clarification on this.
Rental Property Investor · Tampa, FL · Member since 2016 · 208 posts · 96 votes
5y
@Sarah Brown thanks, that was my plan. But what i'm trying to discover is without a purchase/sale and the loan still in my personal name, does the LLC actually provide tax and legal protection?
@Jeffrey Klawitter thank you for that. This will be a permanent rental so the gains tax will apply upon sale. This was an accidental "house hack" which I'm now realizing I should reframe to be like a traditional rental
@Sarah Brown thanks, that was my plan. But what i'm trying to discover is without a purchase/sale and the loan still in my personal name, does the LLC actually provide tax and legal protection?
There is no tax protection for an LLC. The LLC is only a pass through for tax purposes. I have never been given a clear level of protection for the LLC. There will be a lot that is dependent on it. A first year attorney can easily pierce a veil without meticulous record and bookkeeping. It cost me $100 to set up my LLC. It costs me less than $200 per year to have it included in my taxes. It costs me $0 to have myself and the LLC as an insured on the homeowners. I do not commingle funds what so ever, and I have solid record keeping. The minimum effort/cost is worth it to me even if it provides a small amount of protection.