Transferring Property to an LLC can limit your personal liability if someone is injured on the property and files a lawsuit against the property owner as well as insulate each piece of property if you own multiple rental properties. Additional benefits will be the ease of buying additional properties under the LLC that may have more assets in the books. Therefore, I will be able to qualify for a new mortgage without having to pay it off completely.
When transferring a property to a newly created LLC, I am effectively selling it to the LLC. Generally, I am required to pay off the mortgage before I can sell it. Some lenders may not allow transferring the mortgage without fully paying off the debt, some may only allow it after refinancing and securing personal guarantees. However once transferred to the LLC, as I will be the owner of the LLC, I will still have full control over the property.
What I need to do:
1) Contact the Lender: The lender provided the loan to me as a qualified lender that will pay back the loan. Therefore, it would not make sense for the lender to allow me to transfer the property and the existing mortgage balance into a new entity. However, if I can personally guarantee the lender that I will still remain responsible to pay the mortgage if the "LLC" cannot, it would still be a possible scenario. There may be a one-time fee for transferring the loan, potentially increasing the interest rate, or requiring a personal guarantee. Some lenders have an acceleration clause or due-on-sale clause where I will be required to pay off the existing loan before it can be transferred.
I can have collateral in the LLC: equity in other investment properties & Cash in the LLC checking account
2) Form an LLC: I will need to create an LLC
Upon creation of the LLC, I will need to obtain a tax ID number and open an LLC Bank account. With a separate, independent bank account, I will be able to separate the investment property activities from my personal banking activity for better organization and better manage income coming in and the expenses going out.
3) Obtain a form for a deed: I am the grantor and the LLC is the grantee so I will need to consider the requirements by the county recorder or state laws to ensure deeds are valid to be transferred. Afterward, I will need to sign the deed to transfer the property to the LLC. Once completed, I will need to record the deed so that the public records can be documented.
-Title Research: determine the title and how it's held
-New Property Deed: Create the new property deed
-Filing with the county's recorder's office: Fill out the deed and submit
Warranty Deed:
Quitclaim Deed: in IL, this deed transfers title to the grantee without any warranties or covenants of title and is typically used to transfer transactions.
4) Update the lease: I will need to amend the existing lease with the tenants to ensure that correct information is reflected and that the landlord is now the LLC and not me personally. The rent should be paid to the LLC and deposited into a separate LLC bank account. As mentioned above, following these formalities will reduce the likelihood that I will be held personally liable if something goes wrong.
Things to look out for:
Refinancing could be difficult when the property is held by an LLC as opposed to a personal buyer.
Transfer taxes could be incurred
Mortgage and insurance rates can increase because the property is now owned by an LLC that lacks a credit history.
Potential tax consequences like the difference between FMV and the cost basis could be taxed as a capital gain and a potential tax liability.
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