How to Buy a House With an LLC

If you’re considering purchasing an investment property, using a limited liability company (LLC) can be a smart strategy. Buying a property through an LLC offers benefits, such as liability protection and potential tax advantages. This approach can help shield your personal assets from legal claims and provide flexibility in managing the property. However, setting up an LLC and securing financing may require extra steps compared to a traditional purchase.

You can work directly with a financial advisor to help you choose the best route for your business that will have a positive impact on your personal taxes.

Buying a House With an LLC

A major reason people use an LLC for real estate is because they protect the property owner from a lawsuit. For instance, if you form an LLC for your rental properties, if there’s an issue and a tenant sues, they won’t be suing you. They’ll be suing the LLC, leaving your name out of it. There also may tax benefits to owning a property with an LLC.

First and foremost, to buy a house with an LLC, you need to establish one. Because states govern these business structures, each state will have different requirements and fees. Research how to set one up in your state, or hire a service to set one up for you.

Once you have an LLC set up, you’ll need to finance the purchase. Unfortunately, many mortgage lenders don’t give out mortgages to LLCs. LLCs are ineligible for many types of residential mortgages, such as FHA and conventional loans. While there is specific financing available for LLCs, it can be more costly. For instance, it may require a higher down payment than traditional mortgages.

Another option is to buy the house personally and then transfer it to the LLC. This option can come with extra fees and taxes as well. For example, you may have to pay a deed transfer tax. Also, if the mortgage has a due-on-sale clause that the transfer would trigger, you’d have to pay the full amount of the remaining mortgage at that point.

Steps to Buy a House With an LLC

Buying real estate through an LLC takes more planning than a standard home purchase. However, the process follows a clear order.

Legally create the LLC in the state where you plan to operate. This involves filing the required paperwork with your state agency, paying a registration fee and setting up an operating agreement. This agreement specifies who owns the property and how they will make decisions for it.
Get an Employer Identification Number (EIN). Once the LLC exists, you’ll need an Employer Identification Number (EIN) from the IRS. Even if the business has no employees, the EIN functions like a Social Security number for the company. It is necessary for banking and tax filings.
Set up a separate business bank account in the LLC’s name. All money connected to the property, such as rent payments, expenses, and loan proceed, should flow through this account. Keeping finances separate is what preserves the liability protection of the LLC.
Explore financing options. Financing is often the most challenging part. Many residential lenders will not issue mortgages to an LLC, so you may need to look at commercial loans, local banks or private lenders. These loans can come with higher rates and shorter repayment periods. Some owners buy property in their own name and transfer it into the LLC later, but this approach can trigger extra costs, such as deed transfer taxes or a due-on-sale clause in the mortgage.
Close on the purchase. When you close on the purchase, the deed and title should list the LLC as the legal owner. Expect slightly higher closing costs, since title companies and lenders often charge more when dealing with a business entity.
Keep the LLC active. The work does not end after closing. Most states require an annual filing and fee to keep an LLC active. Accurate bookkeeping, tax filings and proper documentation are also essential. Staying current on these requirements is what keeps the LLC’s liability shield intact.

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Benefits and Drawbacks of Using an LLC to Buy Real Estate

An investor fills out paperwork to create an LLC.

Benefits

Using an LLC to purchase real estate offers several advantages:

Privacy. If you own a real estate investment business, having an LLC allows you to separate your personal life from your business endeavors. Instead of your name and information on the paperwork, it’s the LLC’s.
Tax benefits. LLCs remove the possibility of double taxation, also known as a pass-through tax structure. This means the LLC will pay the taxes on profits, and you’ll only pay taxes on your allocated share.
Easier partnering with other investors. LLCs make it easier for people to partner up for investments. This could be with a single partner, or the LLC can be structured to sell shares to distribute profits.
Limited liability. This is the big reason to form an LLC. As the owner of the LLC, you’re not personally liable. The LLC can go into debt or be sued without you having to fear that it will affect you personally.

Drawbacks

There are some drawbacks to consider as well, including:

Cost. Creating and maintaining an LLC costs money. The fees to set up and maintain an LLC vary by state, but you can expect to pay a few hundred dollars upfront. Plus, you’ll need to pay yearly filing costs, which range from $50 to $100.
Challenges getting a mortgage. Many mortgage lenders don’t lend to LLCs due to the risks involved. If the LLC defaults on the mortgage, the lender could lose out. On top of that, Fannie Mae and Freddie Mac loans, as well as government-sponsored loans like FHA loans, aren’t available to LLCs.
Loss of the capital gains tax exemption. Homeowners who profit off the sale of their primary residence don’t have to pay capital gains tax on the first $250,000 of profit ($500,000 if married). If the LLC buys the home, it’s can’t be your residence. As such, you forgo this tax exemption.

The Legal and Financial Implications of Buying a House With an LLC

If you buy a house with an LLC, there are several legal and financial implications to be aware of. First, you can’t live in the house that you’ve bought with the LLC. This is what’s known as “piercing the corporate veil,” and if there’s a lawsuit, it can cause the courts to disregard the LLC. The house needs to stay separate from your personal use.

Second, buying a house with an LLC is going to be costly. You will have to pay LLC fees and also finance the purchase. If you’re unable to get a mortgage, you may have to explore other financing options, which could have higher interest rates and shorter repayment periods.

Maximizing Tax Benefits When Buying a House With an LLC

If you optimize your taxes with an LLC, you can reap major savings. Properties aren’t taxed directly to LLCs. Instead, you’ll only pay taxes on your share of the profits. Also, all LLCs can use depreciation deductions to lower their tax bill further.

To get a full understanding of how to make the most of LLC tax benefits when buying a house one, speak with an accountant. Different LLC structures have different benefits and costs associated with them.

DSCR Loans: A Common Way to Finance an LLC-Owned Property

Since conventional mortgages generally aren’t available to LLCs, most investors turn to a debt-service coverage ratio (DSCR) loan instead. It’s worth understanding before you start shopping for a lender.

The qualifying process works differently than it does for a conventional mortgage. Rather than digging into your personal tax returns, pay stubs or employment history, a DSCR lender looks primarily at the numbers the property itself generates. They’ll compare projected or actual rent against the monthly loan payment to see if the math works. Because the underwriting centers on the property rather than on the borrower’s personal finances, this structure tends to fit LLC ownership naturally, since the LLC is technically taking out the loan.

However, DSCR loans typically carry higher interest rates than conventional mortgages. Lenders also often require a larger down payment, commonly in the 20% to 25% range and sometimes more depending on the property and the lender’s risk tolerance. Some DSCR loans also include prepayment penalties. These can can matter if you plan to refinance or sell the property within the first few years of ownership.

Because DSCR loans are offered by a wide range of lenders, banks, credit unions and specialty investment property lenders, terms can vary significantly from one lender to the next. It’s worth getting quotes from multiple sources rather than assuming the first rate you’re offered reflects the broader market.

If a DSCR loan doesn’t fit your situation, other options exist. For instance, you may explore portfolio loans held directly by smaller local banks or private and hard money lenders, though these often come with even higher rates or shorter terms. A mortgage broker who specializes in investment property financing can help you compare what’s actually available for your specific property and LLC structure.

Bottom Line

Before you try to buy a house with an LLC on your own, it's a good idea to consult an accountant or a financial advisor.

Now that you know the basics of how to buy a house with an LLC, you’ll see that it isn’t for everyone. There are a lot of costs associated with it, from setting up the LLC to financing the purchase. However, there are also several benefits, such as maintaining your privacy and protecting yourself from lawsuits. You may lose some tax benefits, but depending on the LLC’s structure, you may gain some, too. Before you try to buy a house with an LLC on your own, it’s a good idea to consult an accountant or a financial advisor for guidance.

Tips for Buying a Home

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