Primary residence into investment property

[Andy Wilson]

Hi BP,

I am moving and try to keep my primary home and rent it out. Can I transfer my primary home into my LLC as an investment property?

[Joe Splitrock]

In most cases with conventional Fannie Mae or Freddie Mac backed mortgages, you can transfer the title into an LLC. People mistakenly say that it will trigger the "due on sale" clause, but that changed a few years ago. Check your specific mortgage paperwork and contact your mortgage servicer before proceeding with the transfer. Here are some general conditions of doing it:

1. Fannie Mae mortgages originated after June 1, 2016 or Freddie Mac was earlier (not sure on date)

2. LLC is controlled by the original borrower or the original borrower remains the majority owner.

3. The change does not violate the original loan provisions, such as 12 month occupancy requirement.

4. The property must be transferred back to the individual owner prior to any refinance application.

5. Insurance must be updated to reflect ownership change.

You asked "can I transfer my primary home into my LLC as an investment property" but the more important question is "should I transfer my primary home into my LLC as an investment property". Here are some considerations:

1. There is cost and time involved with maintaining an LLC.

2. There are no tax benefits because it is a pass through entity and you are the sole owner.

3. The mortgage is still secured in your personal name. If you are paying the personal debt from your business account, it could be seen as comingling personal with LLC funds. In general you need to be extremely careful to keep the LLC funds separate from personal.

4. If you are self managing, that can still open you personally to litigation if your management decisions create the liability. You can also layer your property management company in an LLC but it gets more complicated. Using a property manager removes you one level from the day-to-day and reduces risk.

5. Even if you have an LLC, it is most important that you have good liability insurance. This means high limits protecting the LLC. Some people have umbrella policies on their personal insurance but be aware that transferring the property into an LLC means the personal umbrella will not cover the property in the LLC. What this means is putting a property in the LLC may require you to carry high liability coverage on the property itself in the LLC and in your own name personally. That would added insurance expense.

6. If you do setup an LLC, do not use a DIY legal website to set it up. You want it setup by a local attorney who would be the same attorney defending you in a lawsuit. Too many people setup entities but never structure or use them properly. An attorney can walk you through it. If done wrong, you just have a false sense of security.

Just in general you need to weigh the risk based on your personal assets, location and overall risk of the property. If you have very low net worth, don't live in a lawsuit crazy location and the property is safe/in good condition, the risk is low. Some people may argue, "what is the harm in having an LLC?" As long as you setup insurance property, it is mainly a cost issue.

Before proceeding with transfer to an LLC talk to these people:

1. Mortgage servicer to make sure you can transfer it within the terms of the mortgage contract

2. Attorney to advise on if it is necessary and to set it up properly

3. Accountant to understand tax ramifications. It should not affect taxes paid, but will create extra effort to file.

4. Insurance agent to make sure the policy and liability coverage are setup properly.