Can I (or Should I) Put My House Into an LLC?

The easy answer to this question is from a legal perspective, yes, it is possible to put your primary residence into a Limited Liability Company (LLC).  But, there are reasons why this might not be the right thing for you. Below are some issues to consider when thinking about transferring ownership of your primary residence to an LLC.           

 

Asset Protection

First, a reminder of how limited liability (one of the key benefits provided by an LLC) works to protect your assets. When you create an LLC to hold a business or property, it separates those assets from your personal assets. As long as the entity is structured and maintained correctly, a lawsuit brought against the LLC generally cannot reach your personal assets. This is called inside liability protection. Conversely, a lawsuit brought against you personally typically cannot reach the LLC’s assets. This is called outside liability protection.  Thus, holding your home in an LLC may seem attractive from an outside liability perspective, but not from an inside liability perspective.

 

Business Purpose

Does your home have a business purpose? Because an LLC is a business entity, it needs a business purpose in order for limited liability to apply. If you run non-business assets through your LLC, you risk a court disregarding your entity and loosing any liability protection it provided. One way to create a business purpose is to have the LLC to hold your home and then pay rent to the LLC in exchange for your accommodations. But present serious tax implications, as the rent becomes taxable income for the LLC, and in turn, taxable income to you.
 

Tax

One important tax benefit of being a homeowner is the Capital Gain Exclusion, which allows single taxpayers to exclude gain up to $250,000 and married taxpayers to exclude gain up to $500,000 on the sale of a home that was a primary residence for two of the last five years. By transferring your residence to an LLC you lose this tax benefit. You will also no longer qualify for property tax and mortgage interest deductions on your personal tax return without claiming rental income. A further concern is that if your residence is owned by an LLC, it may no longer be eligible as a homestead for property tax purposes.
 

Transfer Costs

The State of Maine requires real estate transfer tax to be paid on any property that is transferred, with several exceptions. If you don’t qualify for any of these exceptions, and depending on the value of your home, you may end up owing transfer tax on the transfer of your home to the LLC. Additionally, your mortgage may have a due on sale clause that requires full repayment of the mortgage in the event of that the property is transferred to an LLC.

 

For many people, transferring their primary residence to an LLC presents a range of issues and may not provide the intended asset protection. Asset protection techniques used in estate planning, such as planning with irrevocable or grantor trusts in conjunction with an LLC, may better help you achieve your asset protection goals. As always, we recommend consulting an attorney who is experienced in the areas of business, estate planning, tax, and asset protection. If you have any questions or would like to discuss how you can protect assets, feel free to give us a call!