How to protect my former primary as a rental?

Question

I "house hacked" my primary home without really knowing what that was. We currently have a renter in there but the house is still in my personal name. I have separate LLC's for my rental properties and for some reason never thought of personal asset protection for this one.

My question is, how do I go about converting this into a protected asset? Do I need to create and fund and LLC and sell it to myself? Can I simply transfer the title? Any advice?

I'm in North Carolina if that matters regarding state rules.

Thanks!

Sarah Brown · Answer

This is what I do with mine.  I buy them as owner occ, move in and fix them up, move out, turn it into a rental, and transfer title to an LLC.  Keep in mind if you have a loan, the lender generally has a clause that says if you transfer title they can call the note due.  They have never done that to me, but doesn't mean they can't. I have insurance covering both personal and LLC name.

Chris Mills · Answer

For me, in those cases, yes. I would highly recommend not taking that as legal advice for your specific situation though.

Chris Mills · Answer

Hi @Brian Orr,

I've done this a few times in a couple states. Once I moved out, an attorney helped me form an LLC and transfer ownership. I would imagine NC is the same, but consult an attorney to be sure. I'd be happy to chat about those experiences if you think it would be helpful.

Sarah Brown · Answer

Putting your primary residence into an LLC won't really do you much good.  I wouldn't waste your time or money.

Sarah Brown · Answer

There is no tax protection for an LLC.  The LLC is only a pass through for tax purposes.  I have never been given a clear level of protection for the LLC.  There will be a lot that is dependent on it.  A first year attorney can easily pierce a veil without meticulous record and bookkeeping.  It cost me $100 to set up my LLC.  It costs me less than $200 per year to have it included in my taxes.  It costs me $0 to have myself and the LLC as an insured on the homeowners. I do not commingle funds what so ever, and I have solid record keeping.  The minimum effort/cost is worth it to me even if it provides a small amount of protection.

Brian Orr · Answer

@Sarah Brown thanks, that was my plan. But what i'm trying to discover is without a purchase/sale and the loan still in my personal name, does the LLC actually provide tax and legal protection?

@Jeffrey Klawitter thank you for that. This will be a permanent rental so the gains tax will apply upon sale. This was an accidental "house hack" which I'm now realizing I should reframe to be like a traditional rental

Brian Orr · Answer

Thanks @Chris Mills - the concern on the fund mingling was essentially the legal concern about keeping the asset apart from personal funds. I hadn't thought about the bank payments specifically... So with what you've done, has your lawyer proposed that simply the deed transfer is enough to provide the legal protection in case of a lawsuit?

Chris Mills · Answer

@Brian Orr Not really. My attorney drew up the state specific paperwork to do a deed transfer, which I got locally notarized and they filed for me. The legal costs from my attorney and the title company helping with the deed transfer were the main costs.

The existing note got paid from the LLC going forward with funds received from my property management company (or owner contribution initially). No common funds at any point. Never even late on a payment, much less missed one, so the bank never said a peep. My thinking is that they don't care unless and until there's a problem. If there is a problem in the future, you technically run the risk of them calling the note due in full. Most banks build that in to their loans. To my knowledge, no one has ever heard of that actually happening, or experienced it personally. Something to keep in mind though. You can always refi if you're concerned.

Brian Orr · Answer

Thanks @Chris Mills - I have a call into my attorney now. Was there any financial impact in the transfer? I'm wondering if the LLC doesn't actually buy the property, is the veil essentially punctured already with common funds?

How to protect my former primary as a rental?

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