How to Transfer Real Estate to an LLCby
Given all the advantages of owning real estate as an LLC, it's no suprise that a client might come to you for advice. Here, Melissa Pedigo runs through what your client will need to do to transfer real estate to an LLC, from forming and registering the LLC to opening business accounts to keep personal expenses separate. Follow these easy steps, and your client will have an LLC in no time.
Most people buy property in their name because it’s easy. However, listing property under an individual’s name can create problems down the road, like liabilities for any troublesome incidents. So, it’s understandable why your client might come to you wanting to transfer their real estate to a limited liability company (LLC).
But what’s involved in transferring property from an individual to an LLC? There are a few relatively easy steps to take, and we’ll walk you through each of them.
Contact the Bank or Lender
Transferring the real estate title to an LLC doesn’t transfer the mortgage, so your client must contact their bank or lender if the property still has a loan. Lenders typically handle these situations in three ways:
- They allow the transfer to an LLC as long as your client personally remains liable on the mortgage. Your client must continue to make timely mortgage payments and be responsible for any late fees.
- They could require the LLC to refinance the mortgage in its name. But unless the LLC has an established credit history and income, your client will likely have to sign a personal guarantee to make payments if the LLC fails to do so.
- If the lender has a “due on sale” clause, which means the mortgage must be paid off when the property is sold or transferred, they can enforce this clause and require your client to find a new mortgage.
Form the LLC
If your client doesn’t already have an LLC, they should take the following steps to form one.
Choose a Business Name
Registering an LLC comes with a host of perks. But before your client can reap the benefits, they’ll need to complete the registration process – and that begins with naming their LLC. Naming rules vary by state, but in general, the name needs to be unique and memorable and include “LLC” or “limited liability company.”
Also, the name generally can’t include:
- Anything that implies the LLC is a bank, corporation, insurance company or other regulated enterprise when it is not.
- Words or abbreviations that could be confused for governmental entities (e.g., IRS, Homeland Security, FBI, etc.).
- Words like “corporation,” or “incorporated” or their abbreviations since the LLC isn’t a corporation.
The state agency handling your client’s application must also approve the name. In most cases, the agency will be the secretary of state. If they reject the name, they will also reject the application to file articles of organization, which we talk about later.
Appoint a Registered Agent
All states require an LLC to have a registered agent, which is a person or business entity that accepts legal documents, tax forms, official government correspondence and other important documents on the LLC’s behalf. Your client can appoint themselves, a colleague or a professional service as the registered agent provided they meet the state’s criteria. Ideally, your client will not designate themself as the registered agent so your client can:
- Stay informed of state requirements and comply with the law
- Keep a backup of all their essential legal and business documents
- Have peace of mind and focus on running their business
- Avoid having to track deadlines and maintain flexible business hours
- Maintain their privacy (The agent’s address will appear in the public record. It’s crucial for your client to take this step if they run their business out of their home.)
File the Articles of Organization
The next step is to file the articles of organization, also known as a certificate of formation or certificate of organization depending on the state, with their state’s secretary. The articles of organization are the official document that creates the LLC and grants it the right to do business in the state.
Your client can complete the articles of organization in person or on their secretary of state’s website. The articles include details such as the LLC’s name, the registered agent’s name and address, the owners’ names and how they’ll manage the LLC. A filing fee – typically around a few hundred dollars – will apply when your client submits the articles of organization.
Obtain an EIN from the IRS
Once your client forms an LLC, they’ll need an employer identification number (EIN) from the IRS.
File a Deed with the Local Registrar’s Office
Your client will need to file a new deed for their property’s location with their county recorder’s office. They can do this online or have their lawyer prepare it for them. Deeds generally come in two forms: a warranty deed or quitclaim deed. Deed requirements vary from state to state, so your client will want to use the deed that’s appropriate for their location.
Next, they’ll need to sign the deed to officially transfer it to the LLC. Depending on state laws, your client may need witnesses or notarization during the signing process. Your client can now send the new deed to the registrar’s office, which will keep it in the public record.
Update any Real Estate Leases
If your client is transferring a rental property, they should amend any lease agreements and update them to reflect the LLC as the landlord. Legal documents like city permits, leases, utility accounts and the contract with their property manager should also reflect the LLC as the owner or responsible party. Rent payments will now be made out to the LLC and deposited in the business bank account.
Open a Business Bank Account
Whether it’s to receive rental income or pay for a business expense, a separate bank account in your client's LLC’s name is crucial. That way, it will be easier to calculate any taxes they owe and avoid jeopardizing the limited liability protection they enjoy from the business.
A business bank account also helps your client develop a relationship with their bank or lender in case they need financing in the future. Plus, it projects professionalism, respect and trust to external parties when your client pays with a check in the business’s name.
Transferring real estate to an LLC is relatively easy. With just a few steps and their lender’s consent, your client can reduce their personal liability for claims relating to the property.
Melissa Pedigo is a US CPA with more than 20 years of experience. She’s worked at Big 4 firms, for the government, and internationally. Now a full-time writer, she enjoys translating complex financial and tax topics into plain English.