Transferring property to LLC

[Pichael Miper Holmes]

Hello, Bigger Pockets!!

It is with great joy that I announce that my wife, Piper, and I have closed on our first rental property! We bought a 2/1 in OH and have the property management company in place to get it rented ASAP. We also used a service to establish an LLC to own the property and I would love anyone's advice who has already accomplished the task of transferring ownership in preparation for proper tax filings next year. I would like to avoid any pitfalls, speed bumps, and hurdles that I can, or at least prepare myself properly for them in order to navigate them successfully if they cannot be avoided.

Thank you all for your experience, we are looking forward to hearing from you!

Michael and Piper Holmes (Newbies!!)

[Todd Hoffman]

Congratulations!

Here is a list of items to consider when transferring a title of rental property from individuals to an LLC (and I would advise consulting a good attorney with local knowledge, especially your first time if you are not a legal expert):

• Title Insurance: Transferring the property may void your title insurance. Review the title insurance policy and contact your title insurance company about the planned transfer. The insurance company may be able to endorse the policy to ensure continued coverage.
• Forming the LLC and bank accounts (From your post, I think you did this one): Establish an LLC. This process varies by state but typically involves choosing a name, filing articles of organization, creating an operating agreement, and paying filing fees. You will also likely need to establish a bank account to ensure you can conduct business through the LLC without piercing the veil (and taking on personal liability).
• Prepare a Deed to Transfer Property: Depending on the state (I think Ohio allows both), you may use a quitclaim deed or a warranty deed. Quitclaim deeds are commonly used when the property is transferred without a traditional sale, like to an LLC.
• Filing the Deed: Once the deed is prepared and executed, you need to file it with the appropriate county recorder's office. A transfer tax might be involved, although the amount varies widely by locality.
• Compliance with State Laws: Different states have different rules and requirements regarding property transfers, so it's important to research or consult a legal professional knowledgeable about the law affecting your property.
• Local Rental Rule Considerations: Some towns and cities may have laws regarding rental licensing, registration, or permission. Some may require landlord licenses (or registration). Some, and more common for short-term rentals, may have restrictions making it hard or impossible to re-establish permission after a transfer. Again research and consult before acting.
• Tax Considerations: Transferring property can trigger a "reassessment" of its value for property tax purposes.
• Avoiding the 'Due-on-sale' Clause: Most mortgages have a due-on-sale clause, which allows the lender to demand full repayment upon the transfer of property. Transferring property to an LLC might trigger this clause (consult your loan documents and possibly your lender).
• Hazard/Liability Insurance: You will need to update or change your property insurance policy. Just to remind you, a regular homeowner's policy generally does not cover rental properties owned. While transferring property to an LLC can offer liability protection, it is not a substitute for good insurance. Obtain good liability insurance (some liability coverage can often be included with the landlord or commercial policy).
• Updating Lease Agreements: If you have tenants in the property, you'll need to update the lease agreements to reflect the new ownership by the LLC.
• Planning: Assess the overall costs and plan the order to do the items.

Finally, while this list covers several points, it is not exhaustive, and the complexity of the real estate and tax laws means there may be other issues and considerations. Thus, consulting with a real estate attorney and possibly a tax advisor (depending on the attorney’s depth and scope of knowledge) is recommended to understand all potential legal and financial implications before making such a transfer.

I hope the above content (the “Content”) is helpful. It is intended for educational and entertainment purposes only. I am neither an attorney nor a legal or tax expert. The Content is provided “as is” and should be considered potentially flawed personal opinion without warranties and may not be complete, accurate, appropriate, or applicable to all circumstances. It is not a substitute for professional advice; before making decisions based on the Content, you should consult knowledgeable professionals about your specific circumstances. You should not rely on the Content.