Whether you’re looking to buy a home to live in or for an investment, you may wonder if you can do the transaction through an LLC or limited liability company instead of in your own name. You can, but it’s complicated – and the reason for your purchase is one of the main drivers of whether or not it’s a good idea. Here, we examine the pros, cons, and complications of buying a home with an LLC.
What is an LLC?
LLC is an acronym for limited liability company. It is a type of corporate structure that allows individuals and certain entities to come together as a business. The owners are known as members; A single member LLC can have only one owner. Corporations, foreign entities, individuals, and pre-existing LLCs may qualify as new LLC members. There are various federal and state regulations surrounding LLCs.
Why buy a house with one?
As the name suggests, an LLC provides the benefit of limiting liability to members within the company. “The LLC is a separate entity for the individual. [or people] Attorney Chris Collins, founder of the Ugo Collins firm in Roanoke, Virginia, owns the LLC. This can be a huge advantage when trying to limit your exposure to lawsuits.
Individuals and other entities that want to protect their liability when purchasing property are ideal for purchasing a home with an LLC. It can be especially useful for owners who want to become landlords. According to attorney Andrew L. Schwartz, principal of Stein Sperling in Rockville, Maryland, “LLCs are not individual members by name. “If the property is being rented to tenants, the LLC must be named as the landlord.” The LLC’s separate legal identity, including having a separate taxpayer identification number and using a separate bank account to pay financial obligations, is key, Schwartz says.
Obtaining a loan for the purchase of an LLC
Obtaining a loan to finance the purchase of an LLC can be difficult. They are typically ineligible for a traditional home loan – Lending to an LLC is riskier for the lender than lending to an individual, as it will be more difficult for them to recover losses on a bad loan if necessary.
However, as LLC purchases become more popular, so does LLC financing. “It’s getting easier for LLCs to get loans,” said Shmuel Shayowitz, president and chief lending officer of mortgage-banking firm Authorized Funding. “LLC loans typically require a 25 percent down payment, although there are programs available for lower payments for certain restrictions and requirements. There are programs available for LLCs that use the rental income of the property being purchased as qualifying income and don’t even require personal tax returns.
LLC owners may need to personally co-sign and guarantee the loan, Shayowitz said — so their personal credit score will determine eligibility and interest rates.
However, while LLC members who self-guarantee the loan may have more options and secure a better interest rate, doing so also removes some of the protections of buying a home through an LLC. Special mortgage-loan programs may be better for LLC home purchases, says Daniela Andreevska, marketing director at Mashvisor, an investment-property platform. These could be “hard money lenders, personal money lenders or short-term loans with higher interest rates,” she said.
Buying a home with an LLC: the advantage
Separation of property and limited liability
These are the main advantages of operating any type of business as an LLC, real estate related or not. “An LLC protects the personal assets of its owners,” says Rick Wallace, real estate investor and founder of LLC Dojo. “In the event of legal action, only the assets in the LLC are at risk.”
LLC is the sole party responsible for liability. “If you own multiple properties, it’s a good idea to set up individual LLCs for each property so that the only property owned by the LLC is the individual property at the time of the lawsuit,” says attorney Bona Dochi with O’Flaherty. Law in Naperville, Illinois states that “if an LLC owns all of the assets, all of those assets are liable for the liabilities arising from each of those assets.”
If you need asset anonymity, buying a home with an LLC is a great way to achieve it. When you purchase through an LLC, your personal name is not attached to any public records or other document. This can be especially beneficial for high-income or high-status individuals (such as celebrities) and those who buy high-priced homes.
“Any taxes [on the property] According to Andreevska, it only accrues to the LLC, and you don’t need to pay personal taxes. By avoiding double taxation and optimizing your tax situation, you can save a significant amount of money.
Buying a home with an LLC: Cons
Setting up and maintaining an LLC is not free. According to Wallace, the setup fee can run a few hundred dollars up front, and depending on how the LLC is formed, $50 to $100 annually in ongoing filing costs. Annual tax preparation is also something to consider, while higher interest rates and additional closing costs add to the overall cost of buying a home with an LLC.
Limited financial support
Financing can be challenging for an LLC, especially if one member is unwilling to guarantee the loan. You’ll have to pay a higher down payment than someone buying a home as an individual, and you’ll have fewer incentive programs.
Loss of capital gains
If the home you buy through an LLC serves as your primary residence, you may lose capital gains tax benefits when it’s time to sell.
It’s certainly possible to buy a home with an LLC, but unless you’re a celebrity or real estate investor and don’t want to limit your liability as a landlord, it might not be a good idea. For individuals buying a home simply to live in, the downsides—especially in terms of cost and financing—weigh the benefits.