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I'm a fairly new landlord, and learning as I go. Apparently one of the early mistakes I made when purchasing my rental properties was buying them under my name instead of forming a Limited Liability Corporation to own them.

So I'm trying to fix that, but I'm concerned about what hoops I will likely have to jump through to transfer ownership of the properties to the LLC, especially considering it has a mortgage on it (technically a home equity loan on my primary residence).

Obviously I'll hire an attorney or financial adviser before actually setting this up, but I was hoping the financial gurus here on PF&M might give me a preview of what to expect. Is this a complicated transaction? Any gotchas I should be aware of before embarking on it?

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especially considering it has a mortgage on it (technically a home equity loan on my primary residence).

I'm not following. Does it have a mortgage on it, or your primary residence (a different property) was used as a security for the loan? If it is HELOC from a different property - then it is really your business what to do with it. You can spend it all on casinos in Vegas for all that the bank cares.

Is this a complicated transaction? Any gotchas I should be aware of before embarking on it?

Obviously you should talk to an attorney and a tax adviser. But here's my two cents:

  1. State - your LLC will be doing business in the State where the property is located, and in the State where you live. If this is not the same State - you'll have to register it in both (either as domestic or foreign). Unless you are planning on moving a lot and buying properties in different states - I suggest to set up the LLC in one of these two States, and it doesn't usually matter which one. But do check where being domestic is cheaper than being foreign - that would be the best criteria.

Don't fall for the "incorporate in Nevada/Delaware/Wyoming/Some other lie" trap. You must register in the State where you live, and in the State where the property is. Incorporating in any other State will just add complexity and costs, and will not save you anything whatsoever.

2.1 State Taxes - some States tax LLCs. For example, in California you'll pay at least $800 a year just for the right of doing business. If you live in California or the property is in California - you will pay this if you decide to set up an LLC.

2.2 Income taxes - make sure to not elect to tax your LLC as a corporation. The default for LLC is "disregarded" status and it will be taxed for income tax purposes as your person. I.e.: IRS doesn't care and doesn't know about it (and most States, as well). If you actively select to tax it as a corporation (there's such an option) - it will cost you very dearly. So don't, and if someone suggest such a thing to you - run away from that person as fast as you can.

  1. Mortgages - it is very hard to get a mortgage when the property is under the LLC. If you already have a mortgage on that property (the property is the one securing the loan) - it may get called once you transfer it into LLC, since from bank's perspective that would be transferring ownership.

  2. Local taxes - transferring into LLC may trigger a new tax assessment. If you just bought the property - that will probably not matter much. If it appreciated - you may get hit with higher property taxes.

There are also many little things - once you're a LLC and not individual you'll have to open a business bank account, will probably need a new insurance policy, etc etc. These don't add much to costs and are more of an occasional nuisance.

  • Great feedback, thanks. To clarify the point you asked about. It was financed with a second mortgage on my primary home. Also, this is all within the same county/state. – JohnFx Nov 26 '14 at 4:50

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