Buying a House With an LLC
Buying a house with an LLC can help protect the real estate owners' privacy as well as protect their personal assets in the event of a lawsuit.
This guide examines the LLC structure, the pros and cons of using an LLC for property ownership, and the steps you'll need to take before purchasing.
Recommended: Check out our How to Start an LLC guide to get your company up and running quickly.
What Is an LLC?
A limited liability company (LLC) is a type of business entity that allows its owners to protect their personal assets from liabilities incurred by the company. In addition, LLCs offer limited liability protection for the company's owners.
Some qualities of an LLC include:
- Limited Liability: LLC members are not personally liable for any debts or obligations of the LLC in the event of a lawsuit. This is referred to as personal asset protection.
- Taxes: By default, the IRS treats LLCs as disregarded entities (if they're a single-member LLC) and partnerships (if they're a multi-member LLC). With this pass-through taxation structure, all income and losses flow through to the individual owners.
- Ownership Structure: LLCs are considered separate legal entities from their members. Members do not own shares in the LLC; instead, they hold membership interests. They also cannot transfer ownership of their membership interest without the approval of the other members.
Recommended: Learn more about the different types of LLCs.
Why Buy a House With an LLC?
Before choosing to use an LLC to buy a house, there are several factors you need to consider, such as your ultimate goals and your current financial situation. Let's take a look at some of these factors.
Benefits of Buying a House Under an LLC
Some of the main features of the LLC structure are reasons why purchasing a house with an LLC can be an advantage:
- Tax Advantages: With pass-through taxation, LLC owners avoid "double taxation" (i.e., having profits taxed at both the corporate and individual level) and only pay taxes on their share of the company's profits when they file their personal income tax returns.
- Liability Protection: Limited liability companies protect business owners from personal liability for any debts or liabilities incurred by the business.
- Privacy: LLCs are great for hiding identities and protecting the personal assets and ownership interests of LLC owners. When purchasing an investment property or other forms of real estate, you can use the LLC's name and information instead of your own name and personal information. You can also use an LLC as a way to transfer ownership of a property to another person.
- Simple Structure and Maintenance: Due to its flexible structure, LLCs can easily add or remove members as needed, and members can update their share of ownership as needed (provided these changes are reflected in the LLC's operating agreement).
Drawbacks of Buying a House Under an LLC
Though there are many advantages to using an LLC for home buying purposes, there are still drawbacks that you should keep in mind:
- Risk of Piercing the Corporate Veil: If you want to start an LLC to purchase your own residential property, you can blur the separation between your business and personal finances and can effectively pierce the corporate veil. LLCs are better used for those looking to purchase real estate investment properties.
- Difficulty Finding Financing: If you buy a house under an LLC, you will typically miss out on key residential loans provided to individuals, such as FHA loans or other conventional real estate loans.
- Loss of Preferential Capital Gains Treatment: If you sell a property for more than what you bought it for, you typically have to pay capital gains tax. Due to the home sale tax exclusion, individuals that sell a house can typically exclude up to $250,000 of any capital gain from selling that house. However, a business owner cannot benefit from this treatment when selling an investment property.
Get to know the types of home loans available to LLC owners. Read our guide to Types of Mortgage Loans for Business Owners to learn more.
Setting Up an LLC to Buy a House
Once you know what state you want to form your company in, you can set up an LLC yourself in five easy steps.
Recommended: Use an LLC formation service to save time and easily keep track of your LLC filings.
1. Name Your LLC
When naming your LLC, you'll need to consider your state's naming requirements as well as what names are available for use in your state. You can do a state-specific business name search to help with the process.
2. Choose a Registered Agent
A registered agent accepts service of process on behalf of your LLC. You can elect any individual (including yourself) or entity (besides your LLC) to act as your registered agent, provided they meet your state's requirements. This typically includes:
- Must be 18 years or older
- Must have a physical business address (i.e., not just a P.O. box) in their state
- Must maintain normal business hours (i.e., Monday through Friday, 8 a.m. to 5 p.m.)
You can also use a registered agent service for flexibility and privacy benefits.
3. File Articles of Organization
The Articles of Organization, also known as a Certificate of Formation or Certificate of Organization, officially forms your company with the state. You will need to know your business's basic information, including its name, registered agent, principal address, and member information.
4. Create an Operating Agreement
An operating agreement is an internal document that dictates an LLC's operations, including ownership percentages, membership transfer procedures, member duties, and even dissolution practices. While most states do not require LLCs to keep operating agreements, it's good practice to have one.
5. Get an EIN
If your business has employees, you will need to file for an Employer Identification Number (EIN) with the IRS. An EIN essentially acts as a Social Security Number for your business and is how the IRS identifies your business for tax reporting.
Multi-member LLCs and single-member LLCs with employees must get an EIN, but it's recommended that all businesses get one regardless of whether they're required to get one.
How to Buy a House With an LLC
Once you officially form your LLC, you can begin finding real estate properties to purchase. Although there are different ways to go about real estate investing, there are some general guidelines you should follow:
1. Get a Business Bank Account
All businesses should get a separate business bank account to help with personal asset protection. This will help you separate your personal and business finances as well as make your business accounting simpler.
Recommended: Check out our review of the best banks for small business to find the right one for your company.
2. Determine Your Purpose
There are different strategies for real estate investing that your business can consider, and each can benefit from forming an LLC. The three primary categories are wholesaling, buy and rent, and house flipping.
Wholesaling Real Estate
Wholesaling real estate occurs when a business owner purchases off-market properties at a discount with the intention of selling or assigning the property to another real estate investor. This method requires "buy and sell" contracts, meaning if one of the parties backs out, it can be difficult to update the contract.
By forming an LLC, wholesalers can sign in their LLC's name instead of their own name, making the transfer of ownership easier.
Rental Properties
Some real estate LLCs rent out properties as a means to make passive income. Similar to wholesaling contracts, rental properties require contracts between landlords and tenants. Should your business change ownership, having an LLC and signing under it can help keep current rental contracts intact.
What's more, if a tenant decides to sue you, the LLC structure can protect your personal assets.
House Flipping
House flipping involves the purchasing and rehabilitating of lower-cost properties to sell for an overall profit. When it comes time to sell the house, your LLC can easily transfer the ownership to an individual or another company (or you can transfer LLC ownership as a whole).
3. Find an Agent
A great way to find a realtor who understands the ins and outs of purchasing property through an LLC is to ask around at your local Chamber of Commerce or Better Business Bureau. They will likely know which agents specialize in this type of transaction.
Recommended: Giniel Financial Group works with LLC owners to help them find the best mortgage to fit their goals.
4. Research the Real Estate Market
Once having a plan, it's time to examine what the housing market is like in your area. Consider home types (e.g., single-family, multi-family, townhome, condo, etc.), nearby amenities (e.g., stores, parks, etc.), public transportation, and neighborhood history (i.e., neighboring house prices). All of these will have an impact on what you decide to do with the home.
Make sure you're working with a mortgage lender who wants to help you achieve your goals. Read our Best Mortgage Lenders for LLC Owners review to learn more.
5. Buy the House
Once you find your desired property, it's time to make an offer. If you don't have the proper financing, you can obtain a business loan to help make the down payment. Some business loans are geared specifically toward real estate purposes.
After signing for the home in your LLC's name, make sure to update your business finances and operating agreement to reflect your new business asset.
Need a refresher on what goes into the mortgage process? Read our Mortgage Basics for LLC Owners guide for more.
Should I Buy a House With an LLC?
While there are many benefits to buying a house using an LLC, it's not a simple process. There are many legal fees, formation rules, and financial requirements to consider.
That being said, forming a real estate LLC can help protect you from liability issues, provide tax benefits, and make owning real estate for investment purposes easier.
Frequently Asked Questions
While you can technically purchase a residential home using an LLC, it may blur the line between your personal assets and the LLC's assets. This could result in piercing the corporate veil.
In most cases, the LLC as an entity is the property owner. This makes it easier to transfer ownership, especially if an LLC member leaves or the LLC merges with a new company.
Yes, though this may depend on whether or not you fully own your home or if your home is mortgaged, as this could trigger a home’s due-on-sale clause, which stipulates that the house must be paid in full before transfer of ownership.
No. A Federal Housing Administration (FHA) loan is for individuals and their primary residences, meaning an LLC sign for one to use for investment or rental property purposes.
An S corporation is not a business structure; it is a tax classification elected by LLCs and corporations. Similar to LLCs, living in a house owned by your own S corp can put your corporate veil at risk of being pierced.
If you use your second home for rental purposes, it may be beneficial to put it into an LLC to increase liability protection and make contract signing simpler in the event that you sell the property.
While you do not technically need to use a law firm to form an LLC or buy real estate in your LLC's name, an attorney can help you better understand any contracts, loan stipulations, or ownership restrictions when it comes to your business's properties.