Yes, legally, an LLC can purchase a house or any other type of property.
As a legal business entity, a limited liability company has the right to buy and hold different assets.
The types of real estate deals an LLC can do include the following.
Rental property management: The LLC purchases a condo and rents the apartments to tenants. LLC formation for rentals is popular as you benefit from limited personal liability. If any issue happens at your property, no one can go after your personal assets to compensate for the damage.
House flipping: LLC members can purchase house(s), rehab them, and then resell for a profit. Flipping is easier to do with an LLC as you can easily contract with incorporated and private buyers.
Commercial property purchase and management: LLCs also often own commercial real estate, such as office buildings, retail centers, development land, etc. The LLC can take title to these properties and then either re-develop them or lease the properties out to tenants for profit.
Real estate wholesaling: Trading real estate between two incorporated business entities is contractually easier than doing multiple deals as a private investor.
The assemblage of properties: One LLC can own multiple properties. An LLC can be used to create a portfolio of assets. Additionally, LLCs can be purchased and sold. An LLC that owns numerous properties can purchase another LLC that owns properties rather than buying the properties directly.
Co-buying: LLC members can pull money together to co-invest in different properties. Such deals are governed by the LLC’s operating agreement — a document detailing the contributions and rights to different assets. Plus, an LLC allows you to take money from foreign investors.
Benefits of using an LLC to buy a house
As a business structure, LLC offers its members two primary legal protections:
- Limited liability protection
- Personal asset protection
Both are highly attractive for real estate investments. Limited personal liability means that as a member, you can’t be held accountable for any wrongdoings that happen at your property.
Personal asset protection means that no creditor can go after your personal assets if your company goes bankrupt or faces a high legal bill. The two benefits help business owners isolate risks and preserve their assets. Beyond them, there are several more advantages of using an LLC to buy property.
- Have multiple investors: LLCs allow you to pool money together with friends, family, or business associates to purchase a property.
- Run joint business ventures: You can team up with other LLCs to co-invest in bigger projects. Or join forces with players in adjacent industries such as property management or housekeeping to offer a wider range of services.
- Attract foreign investors: Non-US nationals and residents can’t easily invest in a local property market unless they’re LLC members. Legally, all states allow having foreign LLC members listed on the LLC's Articles of Organization and therefore own the property of the company.
- Easier estate planning: You can easily add new LLC members such as your family members and assign interest percentages across your property portfolio. This strategy comes with several tax benefits and less admin red-tape than the standard inheritance procedure.
- Easy ownership transfer: Instead of selling a property (and paying all associated fees), you can make a new investor an LLC member and assign an ownership percentage to them. Similarly, transferring profits between LLCs or from an LLC to a corporation is often easier than doing private deals.
- Fast access to good credit history: You can buy an LLC with a good credit record to broker more attractive deals for real estate investments.
Disadvantages of using an LLC to buy a house
Using an LLC for investing in real estate has its perks. But there are several significant limitations you should keep in mind. Here are the disadvantages of buying and owning a house via an LLC.
- Business personal property taxes: States like Texas, West Virginia, Virginia, Arkansas, Kentucky, Louisiana, Maryland, Mississippi, and Oklahoma collect taxes on business inventory (including property). This can create an extra tax burden for you.
- Fewer lending options: Businesses have fewer mortgage options and lending schemes. Similarly, you don’t get to profit from many tax exemptions and allowances as you would as a regular homeowner.
- Annual LLC maintenance costs. Recurring LLC costs include state filing fees for annual reports, registered agent costs (if using a professional service provider), plus minimal annual franchise taxes and mandatory business licenses in some states.
- Loss of homestead exemptions. If you transfer your primary residence to an LLC, you’ll automatically lose all homestead exemptions available to homebuyers in your state.
- “Due on sale” clause: If you decide to sell or transfer a house with a mortgage to an LLC, watch out for this sale clause. It means the owner who took out the mortgage must pay back the remaining sum in full at the time of sale.
So who should consider buying a house with an LLC?
Many investors who make a large portion of their income from real estate use an LLC to purchase properties.
If you simply plan to buy one house, perhaps it's not worth going through the trouble of creating and maintaining an LLC. An LLC might overly complicate the transaction if you’re a first-time solo buyer.
However, people who want to acquire numerous houses and commercial properties and build a real estate portfolio will profit from forming an LLC.
How does an LLC file real estate taxes?
By default, an LLC is a pass-through tax entity.
This means that the IRS has no special regime for it. Instead, all business profits follow through to the members’ personal income tax returns.
- Single-member LLCs report taxes as a sole proprietorship
- Multi-member LLC report taxes as a partnership
In this case, all the income you receive from your real estate investments has to be reported on your personal tax return. Then you pay respective tax rates based on your income bracket. Alternatively, LLCs can elect to file federal taxes as:
In this case, your company reports business income separately. S-corp doesn’t have to pay corporate income tax, while a C-corp faces double taxation. LLC members, in turn, only pay personal income tax on the salary they receive from the LLC (rather than all profits made from investments).
In addition to federal and state income taxes, a real estate LLC is also subject to the following types of taxes.
- Business property taxes: Only 12 states don’t charge any taxes on business property. Others collect taxes on all business inventory held or only certain types of it, like real estate. Also, some states such as Maryland require only one filling per legal entity (detailing all your properties).
- Capital gain taxes: Upon selling a house or investment property, the investors will be subject to capital gain taxes. But if you’re filing taxes as a partnership, you can offset these by using various exemptions.
- Minimum annual franchise taxes: States like Alabama, California, Delaware, Texas, and Tennessee, among others, charge a minimum tax for the privilege of doing business in the state. These taxes must be paid regardless of whether you made a profit this year or not.
FAQs about buying a property with an LLC
Here are some frequently asked questions regarding purchasing a house with an LLC.
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Last updated: Sep 2023