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A Guide To Buying A House With An LLC

Melissa Brock7-minute read

June 04, 2021

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You may wonder, "Can an LLC buy a house?"

The short answer: Yes.

You may want to explore the idea of buying a house with an LLC to enable your business to own property or to have your LLC make your next real estate purchase.

No matter your newest venture, you have possibilities – but it can get tricky. We'll go over the details of how to buy a house with an LLC and the possible pitfalls involved.

What Is An LLC?

A limited liability company (LLC) refers to a specific business structure. The main reason a business owner chooses to organize their business as an LLC involves avoiding personal liability as a result of the business’s activities.

Members, which can include individuals, corporations, other LLCs and foreign entities, can own an LLC. Most states also permit single owners to own an LLC. Take a look at the laws in the state where your property is located to understand your state's specific LLC laws.

What Are The Advantages Of Buying A House With An LLC?

You can tap into a few great advantages when you buy a house with an LLC. These advantages include increased privacy, limited liability, tax benefits and partnership opportunities. Buying a house with an LLC also allows you to keep your business separate from your personal life. Let's dive into the details of these advantages one by one.

Privacy

As a business owner, you might find the privacy of the LLC structure appealing when you buy a home with an LLC. Buying a house under an LLC ensures that the LLC’s name, not the owners' names, appears on public documents and disclosures. In other words, LLCs allow you to replace your name with a corporate name, thereby concealing your identity and other information.

Limited Liability

Limited liability means that you, as the owner, will not become personally liable for the company's debts or liabilities. Therefore, if you have a fear of lawsuits as a business owner or real estate investor, the LLC structure may look very appealing to you. However, limitations exist within the limited liability structure.

For example, living in a home owned by an LLC can "pierce the corporate veil." This legal term means that the owners, shareholders, or members of a corporation or LLC can become personally liable for corporate damages, as if the LLC structure never existed.

Tax Benefits

The LLC structure can offer significant tax benefits, particularly because it eliminates double taxation. Double taxation refers to profits taxed at the business level first and then a second time at the personal level. Instead, LLCs enjoy a pass-through tax structure, which means that the LLC pays taxes on profits, but the owner of the LLC does not. However, LLC owners must pay taxes on their allocated share of profits.

Easier To Invest With Partners

The LLC structure makes it easier to invest with partners – even other investors who don’t know the LLC’s principal owner.

For example, two people can launch an LLC as partners. A second member can simply join a single-member LLC and create a multiple-member LLC.

You can also easily sell LLC shares. The easiest way to handle this involves having an existing member sell their shares to a new member. Members must distribute 100% of the shares of an LLC.

Note: This does not mean that unrelated persons interested in buying a home together should consider the LLC structure. Without a true business purpose, the structure will not be considered legal.

Keep Business And Personal Lives Separate

Many LLC owners may like the idea that buying property with an LLC allows them to separate their property ownership from their personal lives. However, owners who use the LLC for personal expenses make it easier to pierce the corporate veil and disregard the corporation or LLC's separate existence should the LLC face a lawsuit. Piercing the corporate veil can become an issue for LLCs of all sizes.

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What Are The Disadvantages Of Buying A House With An LLC?

You should also remember that there are significant disadvantages to buying a property through an LLC before you take this route. Consider the cost, ongoing costs, difficulty getting a mortgage, preferential capital gains treatment and a few other disadvantages, which we'll go over in detail.

Cost

Setting up an LLC can cost quite a bit of money due to legal fees. A major part of the cost involves filing your LLC's articles of organization, which can cost $40 – $500, depending on your state guidelines. You may also pay for business licensing and permit fees.

Once you get your LLC up and running, you may pay special minimum annual LLC taxes, annual report fees, registered agent fees and business license renewal fees.

Make sure you get good legal advice when you form your LLC – you don't want to take the DIY approach with this.

Difficulty Getting A Mortgage

The most difficult part of attempting to buy a mortgage with an LLC structure is that residential lenders don’t like to lend to LLCs because of the limited liability it offers.

Banks know that LLC members and shareholders can't become personally liable for the LLC or corporation's debts. In this case, many lenders will only extend a mortgage loan to a small LLC or corporation if the business owner volunteers their own personal assets to back the debt.

You’ll Pay More

Attempting to buy a property with an LLC gives lenders an unequivocal tip-off that the owner has attempted to purchase the property for investment purposes instead of purchasing a primary residence. This means that because a first mortgage takes priority, an investment property will take a backseat in the event of financial trouble.

In turn, this makes Investment properties carry slightly higher interest rates compared to interest rates on a primary mortgage.

You Won’t Be Eligible For Most Types Of Residential Loans

You cannot tap into all types of residential loans if you want to buy a house with an LLC. For example, you can't get FHA loans with an LLC. In addition, you also cannot get a conventional loan sold to Fannie Mae and Freddie Mac with an LLC.

As a first-time real estate investor who wants to buy a duplex or multiplex unit, you might be better off taking advantage of the FHA’s low down payment options instead of setting up an LLC. You also give up FHA tax perks when you get an LLC. You can deduct the mortgage itself on your personal income and you can also deduct mortgage insurance on FHA loans on your personal income tax.

You’ll Give Up Preferential Capital Gains Treatment

You pay capital gains tax when you sell your house for more money than you paid for it. Normally, you would receive special treatment on capital gains tax when you buy a primary residence. You pay no capital gains tax on the first $250,000 of profit if as a single individual. Married couples enjoy a $500,000 exemption. However, you forfeit this treatment when you own property for investment purposes. 

What Are Asset-Based Lenders?

Investors with multiple properties can consider accessing asset-based loans using their real estate portfolio. Assets such as accounts receivable and inventory are used as collateral. Asset-based lenders will advance funds based on an agreed percentage of the secured assets' value and involves liquid collateral, as opposed to physical assets.

However, you can't tap into these types of loans until you've established a track record of success and purchase multiple properties. These types of loans keep active investors liquid, but they do cost more than residential mortgages.

Who Should Consider Buying A House With An LLC?

For first-time real estate investors, buying a house with an LLC offers far more cons than pros. More experienced investors who plan to make a career out of real estate investing could benefit from using this strategy to advance their business. In particular, experienced investors can own a lot of real estate that protects them from personal liability.

Can I Buy A Property In My Own Name And Transfer It To The LLC Later?

Once you have an LLC, you may wonder, "Can my LLC buy my house?"

If you own your home free and clear, you can transfer your property to an LLC. However, if your home is mortgaged, this type of transfer would trigger the due-on-sale clause and the mortgage acceleration clause.

The due-on-sale clause in a mortgage contract requires a full repayment of the mortgage. In other words, lenders can demand that you pay the remaining balance of a mortgage if you sell or transfer a property. A mortgage acceleration clause means you must pay back the entire loan at once – including the interest that accrued.

Instead of achieving what you wanted, you would have to repay your debt to the lender, so you would have to take out another home loan to pay for your mortgage.

The Bottom Line: LLCs Are Great For Established Investors, But Less Useful For New Investors

Members can gain liability protection within their business entity by establishing an LLC. Your state government can give you an overview of your state's specific LLC laws.

An LLC also offers privacy, limited liability, tax benefits and partnership opportunities. However, you need to watch out for ongoing costs, difficulty getting a mortgage, disadvantages with capital gains treatment and a few other cons.

First-time real estate investors may find it more advantageous to buy property in their own name because of the roadblocks and additional costs of buying a home with an LLC. Established investors should also tread carefully. They should consult a business attorney to determine the best legal structure for their investments.

Remember that it's normal to feel analysis paralysis! To combat indecision, consider applying for a mortgage in your own name and working your way up to more complex investments.

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Melissa Brock

The Rocket Mortgage Learning Center is dedicated to bringing you articles on home buying, loan types, mortgage basics and refinancing. We also offer calculators to determine home affordability, home equity, monthly mortgage payments and the benefit of refinancing. No matter where you are in the home buying and financing process, Rocket Mortgage has the articles and resources you can rely on.