Syracuse, NY · Member since 2016 · 13 posts · 2 votes
Hi Everyone,
We have been planning to move the ownership of our rental property into our LLC for tax reasons and to protect our personal assets. However, our lawyer has informed us that it could be problematic because transferring a mortgaged property to an LLC can trigger a "due on sale" clause in the mortgage documents, which basically states that if the property is transferred the lender can deem that a default, which is an event that allows the lender to call the mortgage (i.e., require it be paid off in 30 days).
Has anyone else come across this issue in NY State? I thought having a rental property owned by an LLC was fairly common for investors. Any advice would be helpful.
What @Mark Bookhagen said is completely true. It is common for investors to have their properties in LLCs, however there are some steps to be taken before that can happen.
Example:
1) If the LLC is an already established business (filed at least 1-2 years of taxes, making money, assets, etc.), it is easier for that LLC to purchase property as it would be for an individual.
2) If you are purchasing a property cash, you can do it through an LLC because there are no income requirements other than the monies to pay it off.
3) If you are starting out for the first time and the LLC is new, you would need to find a lender (I used BB&T for this) who will allow you to purchase the property under your name and do a limited warranty deed to the LLC at closing without triggering the "Due on sale" clause.
In scenario #3, you would own the loan, but your LLC would own the property. You'd still have the standard LLC protections but NOT from the lender as you are responsible for the payments. The GOOD NEWS is that after a year or two of showing your LLC was the one making the payments, some lenders will allow you to move that loan into the LLC as they have been honoring the agreement. At that point, your LLC is established and your DTO and credit are freed up of that debt.
I'm currently doing this with 2 of my properties. It's a good way to get your LLC established.
What @Mark Bookhagen said is completely true. It is common for investors to have their properties in LLCs, however there are some steps to be taken before that can happen.
Example:
1) If the LLC is an already established business (filed at least 1-2 years of taxes, making money, assets, etc.), it is easier for that LLC to purchase property as it would be for an individual.
2) If you are purchasing a property cash, you can do it through an LLC because there are no income requirements other than the monies to pay it off.
3) If you are starting out for the first time and the LLC is new, you would need to find a lender (I used BB&T for this) who will allow you to purchase the property under your name and do a limited warranty deed to the LLC at closing without triggering the "Due on sale" clause.
In scenario #3, you would own the loan, but your LLC would own the property. You'd still have the standard LLC protections but NOT from the lender as you are responsible for the payments. The GOOD NEWS is that after a year or two of showing your LLC was the one making the payments, some lenders will allow you to move that loan into the LLC as they have been honoring the agreement. At that point, your LLC is established and your DTO and credit are freed up of that debt.
I'm currently doing this with 2 of my properties. It's a good way to get your LLC established.
Wow, thanks so much for your very detailed reply! So, our situation is that we established that LLC in December of 2016, but there hasn't been any income and we haven't filed taxes. We purchased our rental property in February 2018, and we put it in our name because it would've been more complicated for the LLC to purchase it and it required a bigger down payment. So, should I contact mortgage company and ask if we can do a limited warranty deed? It would be fine for us to own the mortgage and for the LLC to own the property; just now sure how to accomplish that.
We have a bank account set up in our business name and we pay the rental property's mortgage from that. Is there more that we should be doing to establish the LLC?
You are welcome! Yes you should contact them and see if they will let you. From my experience it's only been able to happen at closing but again, that's my experience.
Here are some ways you can establish your LLC since you already have the property.
1) Have all rents and expenses (mortgages, etc.) paid out of that to show money coming in/out.
2) Get a CC under the business name and use it to pay for all business administrative and random RE costs.
3) Get a "Corporate Account" with someone like The Home Depot. They report to the D&B so you will show business credit there as well as the regular 3 credit agencies.
A simpler option that for some reason never seems to be discussed: with your rental properties in your own personal name, purchase a liability umbrella policy from your insurance company / agent. I pay $250/year for a $2,000,000 liability umbrella. May require paying a tiny bit more and having all of your personal and rental policies with the same company, but honestly not having the extra complexity is nice.
@Tim Burke I see the advantages with both viewpoints; personal name vs LLC and I own property both ways. As a newer investor the only concern with owning in personal name is when you have an "institutional" mortgage on the property. That debt is tied to you personally, thus impacts your consumer credit score and can make it more difficult to get additional mortgages in future.
I was about to post a question in the forum on this question of llc vs umbrella policy.
I have 3 rental properties in my and wife's name. We have assets to protect. We have a 1m umbrella policy for a great price.
My question is I don't think there is a benefit to putting our properties in an llc to protect our assets if we have an umbrella policy. Am I correct? To me the downside of the llc is simply money and paperwork. Two put our two properties in FL in an llc costs 150 per year and paperwork every year.
Fact be told using a LLC is the choice of only about 50% of income property investors. It is not "fairly common" as stated only somewhat common. LLC will increase your costs to operate as well as complicate your taxes and mortgage/financing.
There is actually very little need for a LLC beyond physiological protection and for that reason you are probably better off not transferring at this point in time. Insurance will serve essentially the same purpose according to 50% of investors. Lack of statistics/evidence indicates no real need for a LLC in your case.
You can use a land trust. Transfer your property to a land trust where you are the beneficiary. That would not trigger the due on sale clause (Garn St Germain Act). Then, you can after assign your beneficial interest to the LLC. This second assigment is not recorded and will effectively transfer your property to your LLC.
We have been planning to move the ownership of our rental property into our LLC for tax reasons and to protect our personal assets. However, our lawyer has informed us that it could be problematic because transferring a mortgaged property to an LLC can trigger a "due on sale" clause in the mortgage documents, which basically states that if the property is transferred the lender can deem that a default, which is an event that allows the lender to call the mortgage (i.e., require it be paid off in 30 days).
Has anyone else come across this issue in NY State? I thought having a rental property owned by an LLC was fairly common for investors. Any advice would be helpful.
Thanks!
Ryan
This is the advice I received from my attorney and Title company regarding this very issue which I questioned last year;
As with a trust, lenders do not exercise the "due on transfer/sale" clause when real property is transferred to the same individuals in an official capacity (i.e. Joe and Jane Smith as trustees of Smith Trust). Typically, the same applies to LLCs where you and your wife are sole members. Also, its important to understand that the mortgage doesn't transfer when you transfer to the LLC if you got the loan in your name.
Actual Lenders Title Insurance states;
CONTINUATION OF INSURANCE
The coverage of this policy shall continue in force as of Date of Policy in favor of an Insured after acquisition of the Title by an Insured or after conveyance by an Insured, but only so long as the Insured retains an estate or interest in the Land, or holds an obligation secured by a purchase money Mortgage given by a purchaser from the Insured, or only so long as the Insured shall have liability by reason of warranties in any transfer or conveyance of the Title. This policy shall not continue in force in favor of any purchaser from the Insured of either (i) an estate or interest in the Land, or (ii) an obligation secured by a purchase money Mortgage given to the Insured.
Due-on-sale and due-on-transfer clauses are regulated by the federal Garn-St. Germain Depository Institutions Act of 1982. 12 U.S.C. § 1701j-3(b)(1). That law provides exemptions from enforcement of acceleration clauses including transfers on death and transfers to trusts.
I would recommend that you request approval from your lender and expect that most if not all will agree as their collateral is really not being undermined since you are still on the mortgage personally, not the LLC. In legal speak, the LLC has not "assumed" the debt.
Whether you should or not is something you should decide with advice of counsel.
Finally, this advice is based on Idaho law. Hope that helps...