For high-net-worth individuals, residential real estate serves many purposes. It can be a family home, a vacation or getaway spot, or even a source of extra income. However, if not structured properly , it can also become a costly liability or create complexity when part of an estate settlement. But you can buffer against impacts to your personal wealth and privacy by creating a limited liability company (LLC) to hold your real estate.
In addition to privacy and liability shielding, creating an LLC is generally a low-cost, low-barrier endeavor for the protections it provides.
“Owning or renting residential real estate can be a solid investment or create a meaningful income stream, but can negatively impact personal financial situations if not carefully structured,” said Jonathan Kessler, head of Credit and Cash Management Solutions for PNC Private Bank. “Establishing an LLC to hold residential real estate creates several key benefits including acting as a buffer to your personal assets.”
So what are the primary benefits of holding real estate in an LLC?
- Privacy – Property records are public information and with the multitude of records sites available online, your personal information related to owned properties is readily available to almost anyone. But holding your real estate in an LLC or a revocable trust means any property records will generally be kept in the name of the entity, potentially shielding you from identification.
- Liability – An accident or injury on an owned property can lead to costly litigation. But holding real estate in an LLC may help buffer your personal assets by limiting liability to only the assets held in the LLC. This can be especially important in the case of vacation or rental homes that may have multiple tenants or significant guest turnover.
- Estate planning and taxes – Estate planning and tax benefits of holding real estate in an LLC will be dependent on the laws of your state and municipality, the structure of the LLC, and succession planning. Probate, which is the process of distributing assets of an estate upon a person’s death, is not a uniform process and depending on the decedent’s estate plan, can be lengthy and expensive. Establishing an entity for real estate holdings can give you better control over property transfers and possibly avoid the probate process when passing along assets to heir
An opportunity to protect privacy and shield liability may seem like a foolproof option when it comes to real estate investing, but there are important considerations before creating an LLC to serve as a holding company for properties. First, while generally low-barriers of set up, the process to create an LLC can be time-intensive, requiring multiple forms, business plans, and tax considerations depending on the number of holdings in the LLC. It’s not a free process either, with setup and maintenance fees dependent on the state where the LLC is registered.
The structure and attention to organization is important, as it will help maintain the LLC’s ability to protect your personal wealth. There are instances where an LLC won’t protect against personal liability – particularly when there isn’t proper financial separation between the LLC and the individual that could allow for a creditor or courts to pursue personal assets.
While the actual setup and registering of an LLC can, in most cases, be done from your home, it’s important to talk with tax, financial, and legal professionals that can help sort out how to: structure and separate personal and business assets; advise on fees you need to pay or licenses you may need to operate; and navigate tax obligations and benefits of the LLC structure.
“Creating an LLC and then walking away is not a substitute for good planning or recordkeeping,” Kessler said. “Just like upkeep on a home or car helps to maintain peak performance and value, properly structuring and maintaining your real estate LLC will help provide the best possible protection to your personal assets and privacy.”
Lending and Transferring to an LLC
One very important consideration of whether or not the LLC structure is right for your real estate holdings, is how you plan to buy or transfer properties into the LLC itself. If you plan to add real estate to the holdings of your LLC over time, financing those purchases through the LLC can be tricky. Banks and mortgage companies can be hesitant to lend to an LLC because the structure means that only the LLC’s assets could be used as collateral. Some lenders will only lend to an LLC if the individual owner offers personal assets as collateral for the loan.
As for transferring already owned property to an LLC, that process depends on the level of ownership. Property that is owned mortgage-free can generally be transferred with minimal hassle. It's more complicated if you have a mortgage on property that you’d like to transfer to the LLC as the transfer can trigger immediate mortgage repayment clauses with your lender, which can end up costing more than the potential benefit of the LLC structure.
Corporate Transparency Act
In the event you do decide to create an LLC, you should consult with your legal counsel to discuss your reporting obligations with the Department of Treasury as the holder of a “Beneficial Ownership Interest” under the Corporate Transparency Act (the “CTA”). Effective January 1, 2024, certain persons are required to report their ownership interests in certain entities in order to comply with the CTA. The CTA was enacted by Congress to curb elicit financing arrangements involving business entities, including LLCs. Failure to comply with the CTA could result in severe criminal or civil penalties.
Setting up an LLC to hold real estate can be a powerful tool to protect your personal wealth, privacy and your estate plan – but it’s important to consider if it’s right for you. Prior to implementing any of the solutions/vehicles mentioned above, you should consult with your legal and tax advisors. And your financial advisor can help determine if an LLC will help you get the maximum financial benefit and protection out of your personal real estate.
