Using an LLC to buy a home: What you need to know

When investment companies or private investors buy a house, they often do so using an LLC rather than as individual people. But if you’re a business owner, can you use your existing LLC to buy a home? Or, can you set up an LLC to buy a house?

The short answer to these questions is “yes.” But it’s not so cut and dry. There are firm lines between business finances and personal finances in the U.S., so if you’re thinking you’d rather use your company’s money to buy a house for yourself, you may run into some hiccups.

In this piece, we’ll explain some of the advantages and disadvantages of buying a house through an LLC, and go over how to do so. It’s not for everyone, but read on to see if it makes sense for you.

What is an LLC?

A limited liability company (LLC) is a business structure that allows a business owner to avoid personal liability as a result of the business’s activities. Members of an LLC can include individuals, corporations, foreign entities, or even other LLCs. 

In most states, any one of these entities can own the LLC, but some states have specific LLC laws that may prevent individuals from owning an LLC. Before you proceed with trying to buy a house with an LLC, make sure your state doesn’t prevent you, an individual, from owning the LLC.

An LLC provides certain tax benefits and also provides legal protections. An LLC’s legal vulnerability is usually limited to just the assets owned by the company, so in the event of a lawsuit, the owners’ personal assets remain off-limits.

Who would buy a house with an LLC?

Forming an LLC to buy a house requires you to follow stringent compliance requirements and will complicate your tax situation every year. It’s complex. So, who would do this?

Investors, for the most part. People who are making a career out of real estate investment need the legal protection an LLC provides and can benefit from the pass through taxation structure. First-time investors and regular homebuyers may find the process of setting up an LLC to buy a house just isn’t worth the headache.

You can, however, transfer a property to an LLC later. For instance, if you pay off your mortgage and want to turn it into a rental property, you may transfer the title to an LLC. That’s if you own the property outright. If you still owe anything on your mortgage, transferring the property to an LLC will trigger the due-on-sale clause and the mortgage acceleration clause.

These two clauses basically means a lender can demand you pay the remaining balance of a mortgage in full as soon as you sell or transfer a property. That includes the interest that accrued. So, if you are going to transfer the title to an LLC, make sure you’re done paying the mortgage.

Why would you buy a house with an LLC?

So, what are the advantages of buying a house with an LLC? There is a reason that investors and even individuals occasionally do this. Essentially, an LLC keeps your business life separate from your personal life, which has different perks for different people. 

Limited liability

Of course, the primary reason investors use LLCs is to avoid being personally liable for what happens with a property. Say a tenant gets hurt on a commercial property and your lease agreement doesn’t protect you, the LLC will ensure a lawsuit doesn’t impact your personal assets.

That said, there are limitations to this personal immunity. There are instances in which people living in a home owned by an LLC can “pierce the corporate veil,” making owners, shareholders, or LLC members personally liable for corporate damages. One of the best ways to avoid this is by not using personal funds at all to pay for business-related activities. It may be a bit difficult, but if you’re going to buy a house as a business, you must operate as a business.

Tax benefits

LLC structures may offer significant tax benefits, specifically by eliminating the double taxation that happens when profits are taxed both at the business level and personal level. Because of the pass-through tax structure, the LLC pays taxes on profits but the LLC owner doesn’t have to. LLC owners must pay income tax on the profits that the LLC distributes to them, but they won’t be subject to two separate tax occurrences.

If you’re savvy, you can also use LLCs and property ownership to conceal the source, distribution, and ownership of the LLC’s funds. This can help you avoid taxation altogether but it’s walking a fine line of legality — you’ll need a good accountant to reduce your tax liability legally.

Privacy

When you buy a house with an LLC, the LLC’s name appears on public documents and disclosures. It allows you to replace your name with a corporate name, protecting your identity. There are a number of shady reasons why someone would do this, of course, but sometimes it’s as simple and legitimate as just trying to keep the number of properties you own private.

Investing with partners

Over the past couple of years, friends have been buying homes together at greater rates than ever. That’s mostly because the housing market is so heavily tilted in sellers’ favor all over the country.

If you are going to buy a house with friends or business partners, an LLC may make it easier — especially if you don’t plan to always live together or you view the house as an investment. Distributing shares of an LLC is relatively simple, so you can move ownership percentages of the house or distribute profits from an investment property easily.

That said, you must have a clear business purpose for buying the LLC. Forming an LLC just to move in with friends won’t work unless you can explain the business aspect. Otherwise, the LLC will not be considered legal. 

What are the drawbacks of buying a house with an LLC?

LLCs are a business structure, so it makes sense that the primary benefits of buying a house with an LLC are business ones. The biggest drawbacks, unsurprisingly, are ones that are especially punitive to individuals.

Cost

First and foremost, setting up an LLC is expensive. Your articles of organization — required to create the business — can cost anywhere from $100 to $500 depending on the state. You may also owe business licensing and permit fees and may have to pay annual LLC taxes, annual report fees, registered agent fees, and business license renewal fees.

All told, you could be paying nearly $1,000 every year just to maintain the LLC’s existence. That’s just not worth it for most homeowners who aren’t earning a profit from their real estate holdings.

Mortgage difficulty

Residential lenders usually don’t lend to LLCs because of the limited liability. Since LLC members and shareholders can’t become personally liable for debts (in most cases), it’s an added risk for the bank. If the LLC defaults on the mortgage then… what? It dissolves and the bank is left with outstanding debt and no means of legally recouping it. 

As such, most lenders will only approve a mortgage to small LLCs if the business owner offers personal assets to back the debt. That, as we’ve mentioned, will pierce the corporate veil, diluting the legal protection of the LLC and putting the LLC owners’ personal assets at risk. It sort of defeats the purpose.

There’s also a problem with eligibility. You can’t get FHA loans or conventional loans sold to Fannie Mae or Freddie Mac with an LLC. Many loan programs offer perks like low down payment options or lower interest. LLCs are not eligible for these programs.

Finally, most lenders see an LLC applying for a loan and assume it’s for an investment property. After all, you can’t form an LLC without an express business purpose. Loans for an investment property will always carry higher interest because a second home is a second massive investment, thereby carrying more risk. Thus, banks often saddle LLCs with higher mortgage interest rates, expecting the property to be a revenue-generating one.

Losing tax perks

While investors gain some tax perks, individuals lose them when buying a house with an LLC.

First, you can deduct mortgage insurance or mortgage interest on your personal income tax filing. LLCs can’t do that. Second, LLCs do not qualify for a massive tax benefit reserved for ordinary homeowners.

As long as you’ve lived in your house for at least two of the past five years, you qualify for the capital gains tax exemption. That means you’ll pay no capital gains tax on the first $250,000 of profit (or $500,000 if married filing jointly) when you sell your home. Again, LLCs are not entitled to this tax write-off, so if you’re not an investor, you’re losing one of the best tax perks available to homeowners in the U.S.

Forming an LLC to buy a house may seem like a good idea when you consider some of the tax benefits and legal liability. But if you plan to live in the house yourself and use your personal assets for any home improvements, there’s no point in forming an LLC. As soon as you use personal funds, you dilute the limited liability while missing out on mortgage and tax benefits reserved for individual homebuyers. As such, forming an LLC to buy a house only makes sense if you plan to own multiple properties and generate meaningful income from them.