Buying A House With An LLC: Is It Right For You?

Suppose you’re looking to buy a house as an investment or a primary residence. You might not be aware that buying a house with an LLC instead of using your own name is a good business move for asset protection.

While using an LLC’s name rather than your name to buy a house is possible and beneficial in some cases, it also comes with some challenges. Whether you should go this route depends on a few factors, which we’ll explore below as we help you determine whether buying a house with an LLC is the right move for what you hope to accomplish with a home purchase.

What Is An LLC?

A Limited Liability Company (LLC) is a business structure that’s set up by the state. LLC owners are referred to as members and can include individuals, corporations or even other LLCs.

The primary purpose of an LLC is providing liability protection and a pass-through tax structure that offers tax benefits to its owners. If the LLC is sued for a business debt, the LLC owners likely won’t face personal liability.

Can You Buy A House With An LLC?

Yes, an LLC can buy a house, but the process of applying for a mortgage can be tricky. LLCs are only sometimes eligible for residential mortgages since lenders consider them a higher risk. For example, an LLC likely can’t buy a house with an FHA loan. Because of the liability protections an LLC offers, it’s harder for the bank to recoup its losses if you default on the loan.

In addition to FHA loans, an LLC will likely be ineligible for conventional loans, jumbo loans and other major types of home loans. Instead, you’ll have to look for financing specifically designed for LLCs – but it can come with additional costs.

For instance, the loan will feature a higher interest rate. However, you may be able to lower your rate if you sign a personal guarantee. Even so, your lender may require a down payment as high as 25% of the purchase price.

Why Buy Property With An LLC?

The biggest advantage of buying a house with an LLC is the liability protections it provides. An LLC is viewed as a separate entity from the individual who owns the LLC. So, if someone is injured on your property and files a lawsuit, they’ll be suing the LLC, not you.

This level of protection could be desirable for those who want to invest in real estate. And, if you’re looking to rent the property out to tenants, the LLC will be listed as the landlord.

Pros Of Buying Property With An LLC

Let’s look at some of the biggest benefits of buying a property with an LLC.

More Privacy

When you buy a house with an LLC, the business name is listed on the mortgage, not yours. This offers additional privacy for buyers and allows real estate investors to separate their personal and business activities.

Buying a house with an LLC can also benefit celebrities or high net worth individuals who want to avoid having their names easily found in public records.

Tax Benefits

Buying a house with an LLC comes with a number of tax benefits and helps you avoid double taxation.

Double taxation is when income taxes are paid twice on the same source of income. The LLC will pay any taxes that must be paid on the property, and you can avoid paying personal taxes.

Protection Of Personal Assets

Again, one of the main incentives for setting up an LLC is the protection it provides for personal assets. If you buy a house with an LLC, the LLC alone is liable.

So, if an accident happens on the property and the person involved decides to sue, they’ll be suing the LLC. They can’t go after your personal assets. This kind of protection can be helpful for landlords who own multiple investment properties.

Limited Liability

Buying a house with an LLC provides you with limited liability as the owner or real estate investor, meaning you won’t be held personally liable for your company’s liabilities and debt.

Still, it’s wise to be mindful of the limitations within an LLC structure. For example – to use a legal term – you can “pierce the corporate veil” by living in a rental property owned by an LLC. In that situation, an LLC or corporation’s members, shareholders or owners can be held personally liable.

Simplified Business Partnerships

An LLC can make it easier for multiple investors to partner together on real estate investments.

Because an LLC can have numerous members, it can simplify property ownership among several people. It’s important to note that business owners or members of an LLC legally must have a business purpose.

Cons Of Buying Property With An LLC

While buying a house with an LLC has advantages, some downsides are worth considering as well.

More Upfront Costs

As noted earlier, buying a house with an LLC comes with some additional costs. First, you’ll have to pay a one-time fee to set up the LLC, and depending on the state you live in, you may have annual filing costs.

As also mentioned before, you may be given a higher interest rate on your mortgage and may be required to make a larger-than-normal down payment. In addition, you may have to pay more in closing costs and hire an accountant to handle your annual tax preparation since your taxes may be more complex.

Difficulty Getting A Mortgage

It usually takes more work to get a mortgage when buying a home with an LLC, especially if you aren’t willing to sign a personal guarantee. Lenders see this strategy as more of a risk since LLCs come with more liability protections.

Loss Of Capital Gains Exemption

Homeowners who profit from their home’s sale will receive a capital gains exemption of $250,000, or $500,000 if they’re married. However, when you buy a house with an LLC, you forgo this exemption.

How To Buy A House With An LLC

Next up are the steps you’ll take to purchase a house with an LLC.

1. Establish An LLC

If you don’t already have an LLC, you’ll have to set one up. You’ll start by applying for a free employer identification number (EIN) with the IRS.

From there, you’ll need to research where in your state you can apply for your LLC. The fees and amount of paperwork you’ll need to fill out will vary depending on where you live.

It’s also possible to transfer a property you already own to an LLC.

2. Prepare Documentation

Next, you’ll need to gather the necessary documentation to apply for a mortgage that can finance the purchase. Since financing a home with an LLC can be difficult, plan to shop around so you can find the lender that’s the best fit for your situation.

3. Hire A Real Estate Agent

Even if you’ve already found the property you want to buy, it’s a good idea to hire a real estate agent. An agent can help you make an offer on the home and walk you through the negotiation process.

Is Buying A House With An LLC Right For You?

Buying a house under an LLC may be the right choice, depending on your goals. However, it’s probably more trouble than it’s worth for the average first-time home buyer due in large part to the bigger down payment, higher interest rate and losing the capital gains tax exemption when you sell your home.

The Bottom Line

Buying a house with an LLC is possible, but it won’t be the right choice for many people. Carefully consider the pros and cons of buying a house with an LLC to determine if it’s a smart move for you.

For individuals or groups who are real estate investors, buying a house with an LLC will likely be more beneficial than it usually is for the everyday home buyer. If you’re an aspiring first-time home buyer who wants to purchase a house using a more conventional method, you can begin the mortgage application process today with our friends at Rocket Mortgage^Ⓡ.