Buying A House Under An LLC: What You Should Know

Last Updated on September 16, 2022

Buying A House Under An LLC: What You Should Know

 

Children playing and laughing in the front yard, while dad is talking to his neighbor about the latest news. It is getting late as the sun starts to set. The families go into their homes. Though both family heads make the same income, work the same type of job, and are paid the same amount for their homes, there is a difference in how they mortgaged them. While one father purchased it as a personal asset, the other purchased his home through his business. To help you decide if it is the right choice, we will go over everything you need to know about buying a house under an LLC. Remember that our lending experts at Hard Money Lenders are always available to help to answer any of your questions. Let’s begin. 

What Is An LLC?

An LLC, or limited liability company, is a type of business structure that allows you to limit your liability in case something goes wrong at your company. It’s a bit like an umbrella. If it starts raining, you’re protected under the umbrella. The same idea applies to LLCs. If something goes wrong at your company, you’re protected under the umbrella of an LLC, therefore won’t be held personally liable for any debts or obligations of the company.

Who Is Buying Houses Under An LLC?

There are many reasons why people might choose to buy a house through an LLC. Investors might use them as a way around paying capital gains tax on their profits. Others purchase homes for personal use. And a number of people buy vacation homes that they don’t plan on living in full-time but have nonetheless decided not to rent out (this can save money).

It’s a smart decision to go over your intentions before purchasing your house this way.

Next, we will go over the advantages and disadvantages of purchasing a house under an LLC.

Advantages

Tax Benefits

There are several tax benefits associated with an LLC. For example, you can deduct the cost of any property-related expenses and any mortgage interest. You’ll want to visit the IRS webpage for more on home mortgage interest

In addition, the profits from your real estate investments will pass through to your individual income taxes rather than be taxed at the corporate level like they would if you were operating as a corporation.

Privacy

Compared to a corporation or partnership, an LLC is much more difficult for others to find information about you. This can be particularly beneficial if you are concerned about preserving your privacy when buying real estate.

Limited Liability

You will be protected from personal liability in certain cases. As long as you don’t take on any personal debt in connection with the property, you won’t be liable for business debts either — unless the creditor can prove that you acted negligently or intentionally wronged them.

Legal Protection

In the unlikely event that you are sued for something related to your LLC, you’ll have more legal protection than if you were operating as a sole proprietor or general partnership. For example, if someone sues your corporation, they can go after its assets. But if someone sues your LLC and wins, they’ll be limited to collecting from the company’s assets unless there’s evidence that you profited from any wrongdoing.

If it all sounds good, I’d hate to be the bearer of bad news as buying a house with an LLC does have its disadvantages as well. Don’t let them discourage you though.

Disadvantages

More Paperwork

To set up an LLC, you’ll need to complete several documents with your state and federal government, including articles of incorporation and operating agreements. Depending on your state’s requirements, this can take anywhere from a few minutes to several days or weeks. 

Depending on your state’s laws, you may also need to file additional paperwork. For example, if you’re in California, you’ll need to file a Statement of Information form within 90 days after the LLC is formed.

Financing

Although there are many banks and private lenders that will work with an LLC, some require additional paperwork and verification before they will lend you the money. If you’re planning on buying a home with cash instead of financing it, this won’t be as much of an issue for you—but if you want to get approved right away, it may be better to go with another type of entity like a corporation or partnership instead.

Selling Home

Many lenders require that homes be owned by individuals, not LLCs or other entities. This means if you want to sell your home and move into something else, you’ll need to transfer the deed back into your name—which could take months or even years if there are any issues with the transfer of ownership during that period.

Insurance

Most insurance companies only offer coverage to individuals or families who own their homes outright. If you’re buying your home with an LLC, they may refuse to offer any coverage at all—or they’ll only offer minimal coverage that won’t provide enough protection against major losses like fire or burglary. 

To learn more about insuring your home owned by an LLC  check out this video – Insurance 101: LLC Endorsement for Your Home

So after going over the pros and cons you’ve set your mind to go ahead and make the purchase of your home through an LLC. What’s next? Let’s move on. 

Where To Start?

Step 1. Talk To A Lawyer

A reasonable attorney will be able to help you understand how this process works and give you some guidance on what steps to take next. You’ll also need to make sure that your LLC is properly set up and documented. This will save you a lot of headaches down the road. 

Step 2. Talk To An Accountant

An accountant, who specializes in purchases made through an LLC, can help you understand how its taxes and the purchase process works overall. They may also be able to recommend other professionals that can assist with things like title insurance or mortgage financing.

Step 3. Talk To A Real Estate Agent

It’s important not just because they know what kinds of properties are available but also because a real estate agent can give you additional information on requirements for buying a home under an LLC.

Requirements For Getting A Mortgage

If you’re thinking about buying a house under an LLC, it’s important to know that lenders are going to want to see some serious financials before they’ll approve your mortgage. You can’t just buy a house using your personal income—you need to have a business plan that shows how you’ll be able to afford it and keep it up. Here are some things you’ll need to provide when applying for the loan:

Your Business Plan. 

This should include how much money is coming in, where it’s coming from, and how many expenses there is each month. It should also include any plans for expanding or growing your business further down the road.

Balance Sheet 

This will show lenders what kind of capitalization rate they’re dealing with when considering whether or not to finance the purchase of real estate under an LLC entity structure.

Personal Financial Statement 

Summarizing all income sources over the past three years along with any outstanding debts owed during this time (including credit card debt).

Statement of Your Intentions 

Such as how much time you plan to spend there and any plans you have for it. This should include details about what type of business you want to operate from your home office, if applicable.

Detailed List of All Assets 

This will be a list of assets owned by you and your spouse, including the value of each property. Lenders will be able to determine how much collateral they have available in case you default on your loan obligations.

For additional information on getting a loan, you can head over to our post Tips on getting a loan for your real estate investment

Who Should Consider Using An LLC To Purchase A House?

It’s important to understand the advantages and limitations of purchasing a house through an LLC before committing to it.

If you plan to use your home as a rental property or you have plans to resell it in the future, then 

an LLC may be right for you. 

But…

If you plan on living in your primary residence for years, it might not make sense to set up an entity that will tie up funds and complicate the sale process later on.

Conclusion

As you can see, you’ll want to consider many things before purchasing your home through an LLC. Taking on this type of purchase structure will make sense for some but not for others. 

As a word of advice, don’t rush into making a decision. Whatever you decide to do you’ll want to make sure it is the right one for you. As to the fathers of the narrative above, while they had made a different decisions on purchasing their home, they both woke up with peace of mind for making that decision. We want the same for you. That’s why if you have any questions, don’t hesitate to reach out to us. As our experts here at Hard Money Lenders are just a phone call away. 

Build confidence in why Hard Money Lenders is the right choice for you by reading Why Hard Money Lenders IO?