Place Real Property in LLC

00:00:05
I’m Beau Ruff, and I think you should consider putting your income producing real property into a limited liability company or an LLC. First, what is real property? Real property is any property that is of a non-movable nature like land or house or condo or buildings ETC. And it’s distinguished from personal property. Second, what does it mean to be income producing? Usually, a person wouldn’t place a personal residence into an LLC.
00:00:33
Though the residence may be valuable, it doesn’t produce income, and it’s not easily segregated from personal use. The target property for placement in an LLC is real property from which income is derived and not used for personal use. Perhaps it’s a building from which a person operates a business. Perhaps it’s a single-family home rental. Perhaps it’s land leads to a car wash.
00:00:56
Perhaps it’s a vacation rental property. All of these are good income producing properties and all would be good options for placement in an LLC. Now what’s the benefit of placing income producing property into the LLC? Well, the main reason is to reduce liability exposure. Property owners owe a legal duty to those that come on the property.
00:01:17
The level of duty owed to a person on your property usually depends on the status of the guest, and that level of duty affects the potential liability of the property owner. Insurance provides good protection against potential liability, but insurance has its limits and can’t protect against all possible liability.
00:01:35
And entity with limited liability. And those are things that corporations and LLCS and limited partnerships can provide effective liability protection to protect the personal assets of the entity owner. The assets within the LLC, like the property itself, are still subject to valid creditor claims. But when corporate formalities are followed. The assets of the owner held outside the LLC are not subject to creditor claims.
00:02:01
These kinds of claims can be of the personal injury variety, like a slip and fall on the property, or it can be claims for products or services provided to the LLC, like unpaid rent or maybe a machinery lease that went unpaid as well, now why use an LLC specifically. Of course, there’s many choices for entity selection. The C Corporation, the S Corporation, limited partnerships, LLCS, etc. But the LLC offers liability protection and also importantly passed through taxation, contrasted with the C Corporation, which pays 2 levels of taxation, corporate tax and the dividend when profits are distributed to owner.
00:02:41
The pass-through taxation of an LLC offers significant tax savings for most taxpayers. The S Corporation is also eligible for pass through taxation, but it runs the risk of losing S corporation eligibility based on the limited list of eligible owners. The fear of losing S corporation eligibility tends to favor an LLC. Taxed as a partnership, where the rules are more favorable for ownership.
00:03:07
Now, what happens if I don’t put the assets into an LLC? Well, maybe nothing. However, the owner runs the risk of facing a liability greater than that which is covered by any applicable insurance. One side benefit for out of state property in the LLC is this. When a person places real property into an LLC, it changes the ownership type from that of real property to personal property.
00:03:32
LLC ownership is akin to stock certificate ownership, so the owner no longer owns real property in another state, but instead the LLC owns a real property, and the owner owns the LLC. Typically, real property in a foreign jurisdiction like another state is subject to that state’s probate proceedings upon death. However, if the property is in an LLC. It will not be subject to those foreign states probates proceedings.
00:04:00
A cautionary note, it’s usually best to acquire the property in the name of the LLC. This means that the person should set up the LLC before purchasing the property and then purchase the property in the name of the established LLC.
00:04:15
If the property is owned before the LLC is created, or if the property is outside the LLC, the owner can execute a simple deed to put the property into the LLC. The caution here is this. If the property is subject to a mortgage or deed of trust or a real estate contract, the transfer would likely be a technical violation of the loan agreement which would authorize the lien holder to call the loan. It’s therefore wise to check with your lender prior to placing the property in the LLC. Also, owners must always respect the formalities of entity ownership by keeping separate books and records to effectively show that the entity is separate from the owner himself. For example, the owner should never use company assets or funds for personal use.
00:04:59
Finally, always remember to sign contracts and other LLC paperwork in the name of the entity and with your title. For example, Beau Ruff, President of Ruff Property LLC, talk to a qualified business attorney for more information.