Factors to Consider When Transferring Real Estate Property to an LLC

Key Takeaways

• Transferring any property to an LLC has many benefits but may also pitfalls for the unwary.
• An LLC offers many benefits, including keeping business property separate from personal property for legal purposes.
• You must notify your utilities, insurance, and others of the ownership transfer.
• Always check your lender for a due-on-sale clause.

Transferring property to an LLC can be overwhelming, especially with the potential tax consequences, legal complexities, and risks to your financial stability if not done correctly. Without proper guidance, you could face costly mistakes, such as triggering the unexpected tax consequences of transferring property to an LLC, breaching mortgage terms, or jeopardizing liability protection. At Virginia Beach Law Group, we provide tailored legal solutions to help you navigate the process and safeguard your property transfer. Contact us to discuss your needs.

What is an LLC?

One of the more popular choices of small business structures is a limited liability company (LLC). They can offer liability protection but do have their own administrative burdens similar to other business structures, like C corporations.

The LLC contains features of both a corporation and a partnership. However, instead of shareholders, it has members. A member can be an individual, a trust, a business set up as another structure, or another LLC. As long as the formalities are met during the formation and operation of the LLC, members are generally not held responsible for business debts.

An LLC can be a single-member, general, or limited.

Why Landlords Transfer Properties to LLCs

Virginia Beach Landlords often transfer their investment properties to LLCs for several reasons, including:

• Keeping business assets separate from personal assets to protect the personal assets from business lawsuits
• Pass-through taxation—LLCs do not pay federal income taxes at the entity level
• Flexibility in distributing profits and losses
• Qualified business income deduction under the Tax Cuts and Jobs Act of 2017
• Retirement contributions to solo 401(k) or SEP IRA plan (tax-deferred savings)
• Tax magic can happen when the property is titled in an LLC versus titled in your own personal name.

Tax Consequences of Transferring Properties to an LLC

Despite the benefits of transferring properties to an LLC, there are some tax consequences. You should speak with an experienced business tax attorney before making the transfer, so you do not get blindsided by potential taxes, including:

• Transfer taxes: Virginia charges transfer taxes on properties transferred from an individual to an LLC. These taxes may be based on the property’s value or the transfer document.
• Property tax reassessment: While properties are reassessed regularly, the transfer may trigger an earlier property reassessment, which could increase real estate taxes.
• Mortgage or other equity-based liens: While not a tax, your mortgage company probably has a due-on-sale clause. A transfer to an LLC will trigger this clause, and if your lender finds out about the transfer, you will have to pay the entire balance on the mortgage. Always discuss the transfer with your mortgage company to get lender’s consent for the transfer.

Practical Steps for Transferring Real Estate Property to an LLC

The steps for transferring real estate to an LLC include:

Establish the LLC

If you do not have an LLC, you must establish one. Steps to set up an LLC include:

• Choose a name. Search the Virginia State Corporation Commission for existing business entities to double-check that the name is not taken.
• Complete the necessary LLC registration documents, which can include a detailed operating agreement.
• Identify your Registered Agent.
• Pay the filing fee with Virginia State Corporation Commission.
• Obtain an EIN for the new LLC.
• Open a bank account in the LLC’s name. Lend your new LLC some money so you can at least make the minimum deposit necessary for a new account.

Contact Your Lender

Is the property being transferred subject to a mortgage (meaning: you bought it in your individual name and now want to transfer it into an LLC). ALWAYS contact your lender before transferring any property. All Virginia deeds of trust (the document that in most states is called “the mortgage”) have a due-on-sale clause that will be triggered by a transfer of title from yourself to an LLC even when the LLC is owned by you. The due-on-sale clause means that if the mortgage lender does not approve of the transfer, somebody from the bank might show up on your doorstep to tell you that your loan has been “called,” meaning the entire balance is due and payable right now.

Obtain and Complete the Necessary Deed

You can transfer the property by filing a warranty deed. We generally do not recommend using quit claim deeds. An experienced business law attorney can help you determine which is recommended for your situation, including how your operating agreement was drafted.

Update Leases and Contracts

Pull all leases and contracts for the property, as you will need to update each one with the new property owner and contact information.

Notify Utility Companies

Contact all utility companies to update them on the property’s new owner, even if the utilities are in the lessee’s name. Should something happen and a utility company needs to sue you, you want them to sue the LLC, not sue you personally.

Consult with Professionals

For a smooth and compliant property transfer, work with an experienced professional for all steps, including creating an LLC, drafting deeds, closing on the property, and obtaining tax advice for transferring property from an individual to an LLC.

Do I Need an Attorney to Transfer Property to an LLC?

While you do not need an attorney to create an LLC and then transfer property to it, we recommend working with an attorney experienced estate planning and real estate to guide you through the various pitfalls in the transfer.

Why Clients Choose Virginia Beach Law Group

Business and real estate transactions usually involve a good chunk of change. When you choose an experienced estate planning attorney like Virginia Beach Law Group, the risk of making large financial mistakes in these transactions is significantly lower.

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“Dave really cares about his clients, if you need Wills & Estate planning in Virginia, I highly recommend this law firm. They are compassionate, and extremely thorough.” – Sarah K.

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Simplify Your LLC Property Transfer.

If you are considering transferring property to an LLC, contact Virginia Beach Law Group at 757-486-4529 or complete our online contact form to schedule a consultation.