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Purchasing Property or Real Estate With an LLC Can Be Beneficial but Risky

Ade Hennis - Author
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Jun. 2 2022, Published 8:59 a.m. ET

Purchasing property or real estate with an LLC can provide you with some tax advantages and privacy, but it can also be hard to manage both a business and a property. What are the pros and cons of buying property or real estate with an LLC?

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Owning real estate with an LLC is a great way to buy investment properties and reduce your personal liability when it comes to tenants in the home. While it's possible to live in a home owned by your LLC, it can in some ways defeat the purpose of using an LLC to buy properties. The LLC is meant to separate your business assets from your personal ones.

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There are pros and cons to buying property and real estate with an LLC.

Pro: Pass-through taxes

Owning a property as an LLC allows members to report income or losses on the property on their individual tax returns and pay in the form of personal income taxes, rather than business or corporation taxes. Having an LLC with multiple members allows each person to determine a percentage of ownership in the real estate investment, where one member can take on more of the losses than others, or it can be split more evenly.

Con: Due-on-sale clause

The due-on-sale clause is a common provision in a mortgage loan agreement. If an individual plans to sell their property to an LLC, the borrower must pay the mortgage balance in full when the sale is completed. This could put the responsibility of paying off the remaining loan balance in the hands of the LLC owner.

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Before a transfer of real estate between an individual and an LLC occurs, it's best for the business to check if the mortgage loan is fully paid off or has a due-on-sale clause. If not, the business owner can request a waiver from the mortgage lender before the transfer becomes effective.

Pro: Reduces personal liability

In the case of a lawsuit involving the property, such as a person being injured in the home, LLC members usually aren't personally liable for damages owed. Instead, the LLC that's listed on the deed and title would be liable and only the company’s assets are at risk instead of your personal assets.

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There are some instances where a court can “pierce the corporate veil” in a case ruling and declare that the individual shareholders or members are personally liable for damages or debt owed.

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Con: Annual filing fees

Depending on the state a business owner starts their LLC in, annual LLC filing fees can be pricey, along with all the other fees associated with an LLC and owning real estate. In some states, filing fees can cost little or zero dollars annually, while states such as California charge an annual filing fee of $800 per month. Check to see the costs of initial LLC filing fees, along with annual fees before launching the business to purchase real estate.

Pro: Easier management structure

Hiring a property management company is common for those who own investment properties. However, when owning real estate with an LLC, you can appoint a member in the business to handle property management duties if the person has the necessary experience. This allows the LLC to be more directly involved with managing the home instead of having to rely on a third party.

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Con: Finding a lender

Finding a loan lender for real estate is much harder to find when purchasing a home with an LLC. That’s because in many cases, an LLC won't have an established business credit score and history, which is completely different from your personal credit score.

This often causes a lender to require that you or someone else serve as a guarantor for the property. In those cases, a personal credit score would be used to determine loan approval. If you’re able to pay the loan payments with your LLC, the lender can come after you or the guarantor’s personal assets.

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