If you are thinking of acquiring, or perhaps already under contract to buy, real property – whether commercial, residential, or mixed – that you will rent out to tenants or otherwise hold for business/investment purposes (and not as your personal or family home), you are almost always going to be better off having the property deeded at closing into an LLC owned by you, rather than titled in your individual name.

And if you are already the owner of a rental or investment real property(-ies) titled in your individual name, whether acquired through purchase, gift, or inheritance, there are compelling reasons in most cases<a id="footnote1-ref" href="#footnote1" style="text-decoration: none;">^[1]</a> for you to retitle the property into an LLC, even if doing so will involve some initial up-front transactional costs, as well as some ongoing costs as mentioned below.

The most significant benefit of having your rental or investment property titled in an LLC instead of in your individual name is, as the entity type suggests, the limitation of liability. So long as you take basic and practical precautions (as we have discussed in prior articles) to establish and maintain separate and distinct identities as between yourself and your LLC, your personal assets, such as your home, personal finances, vehicles, etc., will generally<a id="footnote2-ref" href="#footnote2" style="text-decoration: none;">^[2]</a> be protected in the event that some accident or incident occurs at the rental/investment property, and a tenant or other aggrieved party seeks to sue you individually.

Titling your rental/investment property in an LLC rather than your individual name offers other significant benefits:

• It can keep your name out of the property tax records (an important advantage for individuals for whom maintaining personal privacy is a concern).
• It allows you to continue to have simple, pass-through taxation: the rental income and any other income generated from the property, as well as deductions for, say, mortgage interest, taxes and other operating expenses, depreciation, etc., can all be reported on your personal tax return.
• It provides greater ease and flexibility (and also, again, personal privacy) for estate planning and estate administration, because your heirs and trust beneficiaries can succeed you as the holders of ownership interests (including partial/percentage interests) in the LLC, and such transfers can be handled through simple internal (i.e., not public) documents, which tends to be easier and less costly than having to prepare and record deeds conveying ownership interests in the property itself as a matter of public record.
• Likewise, if you ever decide to bring in one or more co-owners, whether they are investors, family members, or others, it is far easier (and, depending on the details of the transaction, potentially less expensive in terms of transfer and recordation taxes) to transfer and assign membership interests in a property-holding LLC than to grant and convey co-ownership interests in the property itself, in the public land records.
• It may enhance your professional credibility and “gravitas” as a property owner when dealing with prospective lenders, prospective tenants, and prospective investors and other business partners.

It is important to note that there are some potential concerns to be aware of, if you are acquiring rental/investment property in the name of an LLC, or transferring rental/investment property from your individual name to an LLC. Many of these potential concerns relate to loan financing. For example:

• There are certain loan types, such as Fannie Mae/Freddie Mac loans for residential properties, that require the property owner/borrower to be an individual, not an LLC, and those loans tend to be available at lower interest rates than the loan types that would be available if the borrower of the property in question were an LLC.
• For any rental/investment property that is already encumbered by a deed of trust or mortgage, retitling it from individual into LLC ownership might trigger the “due-on-sale” clause in the loan documents, unless the lender consents to such retitling.
• Many lenders will lend to an LLC borrower only on the condition that the loan be personally guaranteed by the member(s) of the LLC (and/or others, if applicable).

There are also some cost issues to be aware of when it comes to LLC ownership of rental/investment property, especially if the property is to be retitled from your own name into the LLC. For example:

• Most states will impose recordation and transfer taxes on any such retitling deed, even when there is no cash consideration for the transfer, unless there is an available statutory exemption from such taxes<a id="footnote3-ref" href="#footnote3" style="text-decoration: none;">^[3]</a>. If any such recordation and transfer taxes are required to be paid, the burden of those taxes is effectively doubled in a transaction of this nature, since there is no other interested party in the transaction with whom to potentially split the payment obligation.
• If the property is being retitled into an LLC, there will be some expected transactional costs incurred in updating lease agreements, any applicable state, county or city rental property registrations and landlord licenses, insurance policies, property management agreements, service contracts, and any other contracts and agreements to which you as the property owner have been a party, to reflect that the LLC is now the owner.
• Regardless of whether the property is retitled into the LLC or originally acquired in the name of the LLC, there will be fees and costs incurred in the original LLC formation as well as, in most cases, ongoing state and local requirements to file periodic (typically annual) reports, pay annual entity registration fees, pay personal property taxes, and the like, as well as, if applicable, the costs of annually renewing any vendor contract to provide registered agent services to the LLC.

Unless the costs of the types described above are excessively high, many rental/investment property owners find them to be outweighed by, and thus to be a readily acceptable trade-off for, the benefits that are realized from having such properties titled in an LLC. And it also is important to remember that such costs may qualify as deductible business operating expenses on your annual tax returns for the properties in question, thus lowering the net income reported from same that is subject to taxation.

If you are interested in, or have questions about, acquiring or possibly retitling rental/investment properties in an LLC, the attorneys at RKW are here to help you!

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<div id="footnote1" style=" color: var(--midnight-blue); text-align: justify; margin-top: 20px; font-family: Arial, Helvetica Neue, Helvetica, sans-serif; font-size: 14px; line-height: 24px;">[1] Provided the property is not located in a state, county, or district that both: (a) imposes high transfer and recordation taxes on real property conveyances generally; and (b) does not have available statutory exemptions from transfer and recordation taxes for deeds retitling property from individual into LLC ownership. Maryland is a state in which such statutory transfer and recordation tax exemptions are available, and therefore retitling a Maryland rental/ investment property(-ies) from individual into LLC ownership is usually an affordable and advisable option. <a href="#footnote1-ref" aria-label="Return to footnote 1 referring content."> ↵ </a></div>

<div id="footnote2" style=" color: var(--midnight-blue); text-align: justify; margin-top: 20px; font-family: Arial, Helvetica Neue, Helvetica, sans-serif; font-size: 14px; line-height: 24px;">[2] That is, absent the perpetration of fraud or other intentional misconduct or gross negligence justifying a “piercing of the veil”, making the LLC’s owner(s)or manager(s) personally liable for the resulting damages.  <a href="#footnote2-ref" aria-label="Return to footnote 2 referring content."> ↵ </a></div>

<div id="footnote3" style=" color: var(--midnight-blue); text-align: justify; margin-top: 20px; font-family: Arial, Helvetica Neue, Helvetica, sans-serif; font-size: 14px; line-height: 24px;">[3] It bears mention that any such statutory exemptions usually have multiple conditions that need to be satisfied, which are construed strictly by state and local government officials; failure to meet those requirements would typically prevent such exemptions from being applied (i.e., would require the full transfer and recordation taxes to be collected as a condition of accepting and recording the deed).<a href="#footnote3-ref" aria-label="Return to footnote 3 referring content."> ↵ </a></div>