Transferring property to an LLC is a common strategy for real estate investors and business owners.
Whether you are a real estate investor or a small business owner, there are several good reasons for transferring assets to an LLC. Putting properly in an LLC, or limited liability company, gives you liability protection and can often allow you to pull out equity. And while the process isn’t complicated, it is important that you do your research and do it the right way, considering tax and other implications. That’s why we’ve prepared this guide to help you with the process.
There are essentially two main reasons you should consider transferring property in an LLC:
- To offer liability protection for real estate assets. When you put property in an LLC, your personal assets are shielded from lawsuits or debt collection efforts that involve that property. iTo capitalize your business. A new business needs assets to get off the ground, and owners typically make capital contributions that might consist of cash, personal property, or real estate. In exchange, the owners get equity in the business.
- To inject cash or capital into a new or growing business. When you’re just starting a business, or growing an existing business, you need capital to get things going. When you transfer assets such as cash, personal property, or real estate to your business LLC, you get equity in the business in return.
Starting an LLC
Before you can think about transferring property to an LLC, you’ll need to get the LLC properly set up. Typically, that includes filing articles of organization with your state. Some states have other requirements as well, and often there is a small fee to set up the LLC. You can learn more about setting up an LLC, and find state-specific information in our client resources section. We can also help you set up your LLC quickly, easily, and accurately – you can set up an appointment with a Prime advisor today to discuss your LLC.
Transferring cash and personal property to an LLC
When you start a new business, you typically put some of your own assets into the business to get things started. Cash is typically the number one need, but you may also transfer personal property such as computers, tools, or vehicles to the business.
It’s important that you document asset transfers properly to avoid tax issues. Use the following steps to properly account for your transfer:
- Determine the fair market value of the asset you are transferring. You can do this by researching prices for similar assets in the market.
- If you are transferring personal assets in exchange for a stake in the company, record all of the relevant details in your LLC operating agreement. You should record the asset, the purchase price, the fair market value, and any depreciation.
- If you are transferring property into the LLC in return for cash, then you should record the sale like any other transaction in your accounting records.
- If you transfer an asset with a title, like a car or a boat, you must ensure that all titles are properly transferred to the LLC as well. If the vehicle has a loan attached to it, you will need to seek lender approval before finalizing the transfer.
A good business accountant can help manage these steps so you don’t run into any tax or legal trouble. Our Prime tax advisors are experts in navigating this process, and they are just a click away for a quick consultation.
Transferring real estate to an LLC
When thinking about transferring real estate to an LLC, there are a few key questions to consider:
- Is there a mortgage on the property? If you’ve borrowed money using the property as collateral, you’ll need to check with your lender to see if there are any restrictions on transfer related to your mortgage. If they give you approval to transfer the property to your LLC, that does not absolve your personal responsibility for paying the mortgage.
- Is this a rental property that is currently leased to tenants? If you are currently renting the property out, you’ll need to amend your lease once the transfer is complete to show that the LLC is now the landlord. You will also want to set up a bank account for your LLC and handle all income (rent, etc.) and expenses (maintenance, taxes, etc.) through that account.
When you are ready to transfer the property, you will need a quitclaim deed that is legal in your state. A quitclaim deed is a very simple deed that transfers ownership interest from one party to another without offering any type of warranty or protection to the buyer. Use this form to transfer your ownership in the property to the LLC. This deed will need to be signed and possibly notarized, then recorded by the city or county agency that handles real estate records in your location.
Transferring Property to an LLC: FAQs
Should I put my house in an LLC?
Although each scenario is different, many tax experts advise against putting your personal residence in an LLC, because it can have unfavorable tax consequences. You may lose certain tax exemptions while you own the house, and if you sell it, you will lose your capital gains tax exclusion.
Should I put my car in an LLC?
Transferring a vehicle to an LLC can offer serious liability protection in the event the vehicle is involved in an accident that causes injury or damage. But there are other factors to consider, such as the potential for increases in insurance premiums, registration taxes, and other vehicle-related expenses.
A Prime advisor can help answer all of your questions about transferring property to an LLC, and can even help you set your LLC quickly and easily. Connect with an expert today by setting up an introductory call.