A guide to buying a house with an LLC

Sure, you might've heard of the tax benefits of having a home title in your name. Another option, which can also equal tax breaks, is putting a house under an LLC.

Designed for landlords and real estate investors, this option makes it possible to have your business own a property or make it easier to invest in a real estate investment property with friends or business partners.

While there are certainly some benefits to doing this, you'll want to be well aware of the trade-offs. That way, you can land on the best choice for you. While Rocket Mortgage® doesn't currently lend to LLCs, we'll walk you through what to expect if you want to go this route.

What is an LLC?

An LLC, which is short for limited liability company, is a type of business structure. In a nutshell, it combines elements of a corporation with those of a partnership. For example, the limited liability and separate legal existence of a corporation, along with the flexibility in management of a corporation. In that way, you're getting the best of both worlds.

An LLC protects the owners' personal assets from being pursued for company debt. That is, unless they commit fraud or fail to properly report to the state. Owners may file taxes as a business or an individual. As for pass-through taxation, businesses don't pay taxes at the entity level. This income actually passes over to owners, who pay personal income taxes.

The regulations for an LLC vary by state – so you'll want to check the state's agency for more on the particularities. Buying a house with an LLC also brings up a new set of legal considerations when buying a home – which we'll dive into greater detail – in just a bit.

Can an LLC buy a house?

Yes, an LLC can buy a house. Before you go down this road, you'll want to weigh the pluses along with the minuses.

What are the advantages of buying a house with an LLC?

First, let's start with some of the advantages of buying a house with an LLC: privacy, limited liability, tax benefits, and ease in investing with partners.

Privacy

One of the advantages of buying a home with an LLC is that your name won't appear in public documents. This includes information on your city or county's grantor or grantee website.

It also separates your personal life from your business life. So you won't see your name and personal info on the paperwork – it'll show up under the LLC's name.

Limited liability

The term "limited liability" might be a bit of a head-scratcher, and it essentially means that the liability of the business owner is limited to the amount you've invested in the business. So as long as the business is in compliance with state law, it's not personally liable for the company's debts.

As you might suspect, the property needs to be used for business– think renting it out and raking in passive income, or flipping it and, say, selling it to another real estate investor. That said, if for whatever reason you live in a property that's owned by your LLC, you "pierce the corporate veil" and could end up losing your liability protections.

Tax benefits

One of the more commonly known benefits of buying a house with an LLC is that you can avoid double taxation. It's one of the tax benefits when you invest in real estate as an LLC.

How? Well, when you file taxes on your income from your property as an LLC, LLCs are "pass-through entities." This means that the LLC doesn't pay federal income taxes on business income.

What does happen is income "passes through" to individual members of the LLC. It's the members of the LLC, not the business itself, who pay federal income tax from the LLC. The individual members pay this tax on their own individual tax returns. In turn, this is how you can steer clear of double taxation.

If you're investing in real estate as a whole, you might be able to enjoy tax deductions on property taxes, property insurance, mortgage interest, and the costs to maintain and repair the building.

Ease in investing with partners

Another benefit of buying a house with an LLC is that it's easier to invest with partners. You can partner with another investor, or the LLC can be structured in a way to sell shares and distribute profits.

Here are the differences between what it would look like to invest with a friend or business partner – with and without an LLC.

What are the disadvantages of buying a house with an LLC?

Now, we'll take a closer look at some of the downsides of buying a house with an LLC:

It can be harder to get a mortgage

Wondering if an LLC can take out a mortgage? While it is possible, the truth of the matter is that many mortgage lenders, including Rocket Mortgage, don't lend mortgages to LLCs. That's because of the greater risks involved.

And if you do get approved for a mortgage, you'll likely need to offer a personal guarantee. This is an unsecured loan agreement; should you default on the loan, the mortgage lender can acquire the guarantor's personal assets.

You’ll pay more

Because offering a mortgage to an LLC can feel riskier to the lender – in part because a home bought by an LLC won't be a primary residence – you might see a higher interest rate, should you get approved. In the eyes of the lender, if you find yourself in financial hot water, you'll likely save your primary residence first. In turn, you'll let the one owned by the LLC lapse into foreclosure. This higher rate is to compensate for the additional risk.

Another downside? You can't take out conventional loans from Fannie Mae and Freddie Mac or government-backed loans, like FHA loans, if you’re buying a house with an LLC. Other types of loans, like nonconventional loans, means you might be looking at more strict lending criteria, higher interest rates, and larger down payment requirements.

Besides paying more in interest fees on the mortgage, there are also legal expenses tacked on to setting up an LLC. Common filing fees include Articles of Organization fees, Statement of Information fees, and annual franchise taxes. There might also be fees if you hire a registered agent, as well as for business licenses or reporting fees.

You’ll give up preferential capital gains treatment

Capital gains are profits from selling an asset at a higher price than what you paid for it.

When it comes to primary residences, you can enjoy a capital gains tax exemption. In a nutshell, when you buy a primary residence, you don't pay any capital gains tax on the first $250,000 of profit if you sell it as an individual. Married couples enjoy a $500,000 exemption when they sell a property.

What are asset-based lenders?

An asset-based lender, or ABL, is an alternative form of lending. This is when a lender will look primarily at existing assets instead of cash flow. A wide swath of your company's assets can be used as collateral on your home. For example, this could include real estate, accounts receivable, brand names, and intellectual property.

Financing a home through ABL can be helpful if you have a portfolio or other investment properties. However, if you're a brand-new property investor, you'll probably want to focus on building a portfolio first.

Who should consider buying a house with an LLC?

Buying a house with an LLC is probably best for experienced investors who don't need traditional financing – like a conventional mortgage or FHA loan – or for those who can tap into asset-based lending,

Can I buy a property in my own name and transfer it to the LLC later?

While it’s possible to start off by buying a property in your own name, then transfer your house to an LLC later, it's easiest if you own the home free and clear.

If you do go this route, and your home is mortgaged, you might be subject to a due-to-sale clause. Because you're transferring the home to an LLC, the lender could demand that you pay off the remaining balance of the home loan.

There might also be a mortgage acceleration clause, meaning you must pay back the entire loan at once unless you get permission to transfer it to an LLC.

The bottom line: LLCs are great for established investors, but less useful for new investors

While buying a house with an LLC can be great for established investors with funds or access to alternative forms of financing, it is likely less useful if you're a new investor. If you're interested in applying for a mortgage without going the LLC route, consider Rocket Mortgage.