How to Transfer Property from a Person to an LLC

If you own an investment property, protecting yourself from tax liabilities related to an investment may mean transferring ownership from you as an individual to a limited liability company, or LLC. And if you own multiple properties, you might consider forming multiple limited liability companies to protect each rental property from any claims against your other properties. This may help to minimize your personal and professional liability.

But first, it’s important to understand if it's beneficial for you to transfer rental property from individual ownership to an LLC. Learn how to form an LLC, how to transfer property to an LLC, which tax burdens to be aware of, what financing options are available, and more.

 

How to transfer property to an LLC in 10 steps

Follow these steps to transfer property to LLC business structures.

1. Make sure your LLC is registered

First, you’ll need to get an LLC by filing articles of organization with the applicable state department, typically the Secretary of State’s office. File all of the necessary paperwork, pay the required fees, and, once the LLC is registered, request a certificate of good standing for your business. These certificates are often required for LLCs that buy and sell real estate; check with your state to confirm if you need one.

2. Review the property title and LLC operating agreement

LLC operating agreements aren’t required in most states, but they can be immensely helpful for multiple-member LLCs. Make sure that your operating agreement spells out things like the percentages of ownership, how profits from the sale of properties will be divided, how listing prices will be determined, and so on.

Now that you have set up your LLC, you can transfer your rental property from yourself to the LLC. Review the property title to ensure that this transfer can be made. Keep in mind that there may be costs associated with a real estate title transfer; you should consult your mortgage lender, tax professional, and/or attorney to understand which types of costs might be involved.

3. Draft a deed of transfer

There are two popular types of deeds for property transfers:

• Warranty deeds. When you purchased the property from the previous owner, a warranty deed was likely issued by the title company in order to guarantee that the title was free and clear. You may wish to obtain a warranty deed in order to protect the LLC if there is any issue with the title discovered later on. A valid warranty deed needs to include the names, addresses, and signatures of the seller (you as an individual) and the buyer (your LLC); a legal description of the property; and various legal statements regarding the transfer and covering any potential claims.
• Quitclaim deeds. A quitclaim deed merely transfers ownership and makes no guarantee that the title is good or even if you own the property and are able to transfer it. But because you’re transferring ownership from yourself to your LLC, this type of deed may be sufficient. A quitclaim deed typically only includes a legal description of the property, the county, the date of transfer, and the names and signatures of those involved in the transfer.

Check with the county office in charge of recording deeds for any other requirements or necessary information. 

4. Notarize and file the deed

Whichever type of deed you choose, you’ll need to get the transfer forms for the deed signed and notarized. Then, you will need to file the paperwork with the appropriate office, which is most commonly the county recorder's office. There may be fees associated with registering the deed; check with your local county offices for specific information.

5. Notify your mortgage company

Talk with your mortgage lender to understand how the mortgage transfer process will work. For example, transferring properties that have active mortgages might trigger a due-on-sale clause, which means that the lender can demand immediate repayment of the mortgage balance. Additionally, some mortgage companies may ask for the mortgage to be refinanced, meaning that there would potentially be a new interest rate and loan term.

6. Update tax records

Your property taxes on the transferred rental property will now be billed to the LLC. You’ll need to update your tax records with the applicable agency, usually the county assessor’s office.

7. Transfer utilities and insurance

Make sure to update billing and contact information with your utility companies to match the name of the owner on the deed. You’ll also most likely need to obtain new residential property insurance, as insurance policies typically cannot be transferred to new owners.

8. Plan for tax complications

In some cases, transferring a rental property to an LLC may have certain tax implications, like losing personal tax deductions, triggering capital gains taxes, and more. It’s a good idea to consult a tax professional before making the transfer.

9. Update your LLC’s assets

Now that one of your personal assets has become a professional asset, it’s a good idea to update your LLC’s operating agreement to clearly outline information about the new property, including ownership percentages, future scenarios in which it might be sold, and so on.

10. Check your LLC’s liability protection

Consult an attorney to check your LLC’s current liability protection and ensure that the transfer of property doesn’t disrupt liability protections.

Fees vary by state, but most states charge around $100 to file articles of organization for a new LLC. Additional LLC professional fees may be assessed in states that offer expedited processing.

How to finance your property

Transferring the title of your rental property from yourself to an LLC means that the financing for the property will be affected. There are a few ways to finance the property.

• Sign a personal guarantee for the mortgage. When you purchased the property, your name and financials were used, and you still have an obligation to pay the mortgage. If your LLC doesn’t have any credit history or established income, it will be unable to be the buyer under a new mortgage. It is possible that your lender would be willing to transfer the property title without removing you as the mortgage holder, but otherwise, you may have to sign a personal guarantee to pay the mortgage if the LLC is unable to do so.
• Pay the mortgage in full. Another possibility is that your lender could require you to pay the mortgage in full (called a due-on-sale clause) and pursue new financing. 

This is why learning what your own lender requires before attempting to transfer title from yourself to an LLC is essential.

How to form an LLC for your property

For the purposes of owning individual properties, forming an LLC involves first choosing a name for your LLC, which must reflect the nature of your business entity and contain the words "limited liability company," LLC, or L.L.C., depending on your location. Additionally, you will need to name a registered agent for your LLC. Although you can serve as the registered agent, there may be reasons you choose to hire someone else to act as your LLC's registered agent, including privacy. If you are your own LLC's registered agent, your name and address will be part of the public record of your LLC.

Paperwork required for forming an LLC

There are a few pieces of paperwork needed to form your LLC. First up, you will want to prepare an internal document known as an operating agreement. This will not be filed with the state but will guide you moving forward. In essence, an operating agreement is a blueprint for your business.

You will need to file articles of organization with whichever agency or office handles business filings within your particular state. LLCs can be formed online or in person. In order to complete LLC forms, you will typically need:

• the name of the LLC
• the address of the LLC's place of business
• the purpose of the LLC
• the name of the manager of the LLC
• the name and address of your registered agent
• your signature

Fees vary by state, but most states charge around $100 to file articles of organization for a new LLC. Additional LLC professional fees may be assessed in states that offer expedited processing.

Financial requirements for forming an LLC

An employee identification number (EIN) is a federal tax ID number akin to a Social Security number. The nine-digit EIN identifies your business for federal tax purposes and allows you to open a business bank account. While an EIN from the Internal Revenue Service is only required if your LLC has more than one member or employee, obtaining an EIN is free and will help you keep your personal finances completely separate from the LLC's finances. While you can technically use your own Social Security number for your LLC's tax purposes if you are the only member, it can still be beneficial to use an EIN.

Open an LLC bank account

It is essential that you keep your personal funds separate from your LLC in order to maintain clear records for tax purposes. Open an LLC bank account for any and all financial transactions related to your LLC. Your LLC is a separate legal entity from yourself, and your business finances have to be kept separate.

Update property leases

Now that your property is owned by the LLC, you will need to update all related paperwork, particularly any lease agreements, if applicable. Moving forward, your tenants should be paying rent to a separate bank account owned by the LLC and no longer to you as an individual. 

Get assistance with everything you need to form your LLC with LegalZoom’s LLC formation services, which you can use to fill out articles of organization, file documents with the state, consult with an attorney, and much more.

Benefits of transferring property from an individual to LLC

There are several benefits for investment property owners of transferring ownership from an individual to an LLC. These include financial, legal, and managerial benefits, as well as privacy.

Financial and legal protection

Transferring your rental property to an LLC from individual ownership primarily protects your personal finances from any liabilities against the property. For example, if you as an individual own rental real estate and someone files a claim against the property, you would have personal liability, meaning that your personal assets could be pursued.

However, when you transfer ownership of the rental property from an individual to an LLC, your personal assets are shielded from potential lawsuits or claims by the added layer of liability protection. This means that only your LLC is on the hook for any legal or financial actions.

Management flexibility

Transferring ownership to an LLC means more flexibility in managing the investment property, especially for LLCs with multiple members. With multiple-member LLCs, there can be different percentages of property ownership, and ownership interests can change.

Should your LLC decide to take on employees to assist with property management, you would not be paying them personally, but rather your LLC would pay their salaries. Additionally, the LLC would be responsible for paying employee income tax. A tax adviser or attorney should be consulted for any legal or tax advice related to employees.

Privacy

Another benefit of transferring rental property from individual ownership to an LLC is privacy. When an LLC owns the property, your personal information on real estate records does not become public. Instead, the LLC's address and ownership information is listed on tax records.

What are the tax consequences of transferring property to an LLC?

Although there are many benefits of transferring property to an LLC, there could also be some tax implications, depending on the situation and your specific tax jurisdiction. 

Capital gains tax

If the property has appreciated since you initially purchased it, the transfer may trigger a capital gains tax, which is a federal tax on the profits from selling an asset. When transferring property to an LLC, especially a multiple-member LLC, that likely means that the property isn’t a primary residence. Because the sale of primary residences has different tax implications under the IRS than rental or investment properties, the capital gains tax may apply.

Loss of Section 121 exclusion

As mentioned above, there are tax benefits for owners of primary residences; they can enjoy Section 121 exclusion, also called principal residence tax exclusion. If, upon the time of sale, the taxpayer has owned and used the property as a primary residence for 24 months out of a 60-month period, they do not have to pay taxes on the gain in profit (up to $250,000 for individuals).

Transferring property to an LLC will likely result in a loss of Section 121 exclusion, as the property is probably not a primary residence. 

Gift tax (if the LLC doesn’t pay for the property)

In some cases, if the LLC doesn’t pay for the property, there may be gift tax implications. The IRS mandates that donors of a gift pay the gift tax, meaning that you, as the individual, would be responsible for the gift tax, which can be up to 40%, depending on the value of the property. 

Property tax reassessments

Requirements for property tax reassessments—and even whether or not a reassessment is needed—vary by state. Some states, like California, require property tax reassessments for every change of ownership. So, depending on the state in which the property is located, there may be property tax implications for transferring real estate from yourself to an LLC. 

State-based transfer taxes

Some states have established real estate transfer taxes, which occur during the legal transfer of a deed. These kinds of taxes may be paid to the state or to local jurisdictions; in fact, even some states that don’t require real estate transfer taxes on the state level may include cities or counties that do require it.

The party that pays the taxes, again, depends on the jurisdiction. Some require the seller to pay real estate transfer taxes, while others will accept payment from the seller, the buyer, or both.

Depreciation recapture

There are tax deductions that can be taken to account for depreciation of real estate property (among other types of property). If your LLC claims depreciation deductions on its taxes throughout the duration of owning the property, there may be future tax implications if it decides to sell the real estate property. At the time of sale, the IRS “recaptures” depreciation expenses by charging taxes on the total expenses claimed in state and federal deductions. 

Personal deduction losses

Individual homeowners might be able to take tax deductions on mortgage interest, but LLCs typically cannot claim these tax benefits. Additionally, you’ll lose your Section 121 exclusion.

Transferring property from an S corp to an LLC

What if you've already established an S corp and want to transfer your rental property to an LLC? This can be done one of two ways: by converting your S corp to an LLC or creating an LLC holding company under the S corp and then transferring the property. 

Converting an S corp to an LLC can be a long, complex process, so it might be beneficial to form an LLC holding company instead without dissolving or converting the S corp. Once this is done, transferring property to an LLC from an S corp might incur hefty taxes because the property transfer may be considered a profit distribution; the S corp must acknowledge gain or loss on the distribution. 

Property transfers from an S corp to an LLC are possible, but they may not be tax free. Consult tax experts for requirements and any tax consequences.

FAQs

Can I put my house in an LLC and rent it to myself?

Yes, technically you can transfer your house to an LLC and rent it to yourself. However, this usually isn’t the best option when it comes to tax consequences, as you may lose out on personal tax deductions and need to pay more in the long run with business-related taxes.

How can I avoid property tax reassessment in California?

California law requires a property tax reassessment when the property is transferred from one person to another, which can have expensive tax implications. To avoid property reassessment when transferring to an LLC, the individual transferring the rental property must own 50% of the LLC. If the owner of the LLC decides to transfer ownership of more than 50%, a property tax reassessment will be required. 

Does transferring property to LLC trigger due-on-sale clause?

Yes, a due-on-sale clause may be triggered when transferring ownership of a property, including from an individual to an LLC. This depends on the mortgage lender. 

Can my LLC pay my mortgage?

An LLC can pay a mortgage for the property it owns. So, technically, your LLC could pay the mortgage on the house in which you live, but this may not be advisable due to potential tax consequences. 

Jenn Morson contributed to this article.