The pros and cons of buying a house under an LLC

Quick insights

• Buying a house under an LLC can shield your personal assets from potential lawsuits or debts related to the property, offering an extra layer of liability protection.
• LLCs may provide benefits, such as pass-through taxation, which help avoid double taxation seen in corporations. However, tax implications can be complex and might require professional guidance.
• Buying a house with an LLC is usually more beneficial for experienced real estate investors, business owners and those seeking to protect significant assets or maintain privacy.

Purchasing a property under a Limited Liability Company (LLC) can offer significant benefits, including liability protection, potential tax advantages and enhanced privacy. However, there are drawbacks to this process, which will depend on your financial situation.

This guide will provide critical information needed to navigate the complexities of buying a house with an LLC.

First, what’s an LLC?

An LLC is a type of business structure that can be used to buy a home or property. They’re separate legal entities from their owners, meaning owners aren’t personally responsible for the LLC’s debts or liabilities. For example, if someone injures themselves on your property, your LLC would be liable for damages, not you. If you have questions, consult with a legal professional.

While LLCs can offer buyers significant benefits, they also come with potential disadvantages. From the costs associated with setting up an LLC to the potential loss of property tax exemptions and capital gains taxes, LLCs are an investment strategy that may not be suitable for everyone. If you have questions, consult a tax professional.

Who should consider buying a house under an LLC?

To buy a house under an LLC, you’ll first need to form one, which includes choosing a unique name, filing Articles of Organization and obtaining an Employer Identification Number (EIN) from the Internal Revenue Service (IRS).

You’ll also need to set up a business bank account to fund the LLC and manage property-related expenses. Given the complexities of this process, first-time homebuyers or those who are looking for traditional mortgage financing usually find this approach doesn’t suit their needs. However, this strategy could offer several advantages for certain types of buyers, including:

• Real estate investors: Those managing multiple properties can benefit from the liability protection and potential tax advantages of buying a property through a limited liability company.
• Business owners: If the property you’re considering will be used for business purposes, owning it through an LLC can offer a clear separation between personal assets and business assets.
• Privacy-conscious buyers: For those who value discretion in their property ownership, purchasing a home through an LLC can provide added privacy.

The pros of using an LLC to buy a house

Buying a house under an LLC can be particularly appealing to buyers looking for:

• Asset protection: An LLC separates your personal assets from your business assets, shielding your personal property from potential lawsuits or creditors related to the property.
• Tax advantages: LLCs may offer tax benefits, such as the ability to deduct certain property-related expenses.
• Privacy: Property ownership under an LLC can provide privacy, as the property is listed under the LLC’s name, not your own.
• Business flexibility: If the property is used for business purposes, owning it through an LLC can streamline financial management and provide a clear separation between business and personal finances. 

The cons of creating an LLC for a home purchase

There are some disadvantages to owning a property as an LLC, including:

• Higher costs: When buying or investing in properties under an LLC, you’ll likely face higher interest rates, larger down payments and ongoing maintenance fees. These additional costs can affect your overall investment returns.
• Limited financing options: Not all lenders offer loans to LLCs, and those that do may have stricter requirements, which can limit your financing options.
• Complex tax filing: While there are potential tax benefits, managing taxes for an LLC can be more complex and may require professional assistance. For example, homeowners who profit off the sale of their primary residence can often avoid capital gains taxes on a portion of the profit. However, if an LLC owns the home, this exemption is forfeited.ec-hud-avoid-forclosure If you have questions, consult a tax professional.

How does financing work when buying a property under an LLC?

Financing a property under an LLC is more involved than individual financing, as lenders often view LLCs as higher-risk borrowers. The types of loans available to LLCs can include commercial real estate loans, investment property loans or business loans, depending on the property's intended use.

These loans typically have different terms and requirements compared to standard residential mortgages, such as:

• Personal guarantees: Lenders often ask for a personal guarantee from the LLC’s members, making them personally liable for the loan if the LLC defaults.
• Higher interest rates: Due to the perceived risk, loans to LLCs may come with higher interest rates compared to individual mortgages.
• Larger down payments: Lenders might require a larger down payment, typically 15-25% or more, to mitigate their risk.

For LLCs that may find it difficult to secure traditional financing, asset-based lenders and private lenders can be viable alternatives. Asset-based lenders focus on the value of the property itself as collateral rather than the borrower’s credit history or financial statements. This can be beneficial for LLCs with substantial assets but limited credit history.

Private lenders, on the other hand, tend to offer more flexible terms and quicker approval processes—although, often at higher interest rates. These lenders can be ideal for LLCs needing financing, especially for unique or high-risk real estate investments.

Tax implications for LLCs

When buying a property under an LLC, the business paying the mortgage may have tax implications, especially if it generates rental income or other revenue. LLCs are often treated as a pass-through entity, meaning profits and losses pass directly to the owners’ personal tax returns, which helps you avoid double taxation (any property taxes accrued will be to the LLC only, meaning you won’t need to pay personal taxes).

However, if the LLC is treated as a corporation, you could face corporate tax, and if it serves as your primary residence, you could miss out on capital gains tax benefits when it comes time to sell.ec-hud-avoid-forclosure Depending on your location, some states may also impose franchise taxes or other fees on your LLC, as well. Ensure you speak with a tax professional and research local tax laws and regulations before you move forward.

In summary

While buying a house under an LLC may not be for everyone, it does offer substantial benefits for certain buyers—particularly those concerned with both liability protection and asset protection. Before you purchase a property through an LLC, reach out to a home lending expert. We can help you weigh the pros and cons to ensure this strategy aligns with your financial goals.