Holding Real Estate in an LLC and Due-on-Sale Clauses
Holding real estate in an LLC separates property liabilities from your personal assets, and lenders often expect it for commercial property, but a transfer can trigger the due-on-sale clause in an existing mortgage, which lets the lender demand full payment. Federal law protects some transfers of homes to family trusts, but not transfers to an LLC. Get lender consent first, check title insurance and insurance coverage, and remember a homestead cannot be held by an LLC.
Personal ownership vs LLC
| Personal | LLC | |
|---|---|---|
| Liability | All your assets are exposed to claims from the property | Claims generally reach the LLC's assets and insurance first |
| Financing | Easier to get residential loans | Commercial loans fine, some residential lenders will not lend to an LLC |
| Taxes | Report on your return | A single-member LLC is generally disregarded for income tax, and a multi-member LLC is taxed as a partnership by default |
| Homestead | Available if you live there | Not available. An LLC cannot hold a homestead. |
| Estate planning | Deed or probate at death | Transfer membership interests, often through a trust |
The due-on-sale clause
Nearly every mortgage contains a clause that allows the lender to demand full payment if the property is sold or transferred without consent. Transferring a rental to your own LLC is a transfer. Federal law prevents lenders from enforcing the clause in specific situations, such as a transfer of an owner-occupied home to a living trust, but it does not generally protect transfers to an LLC. Many lenders do not call the loan after a transfer to the owner's LLC, but they have the right to, and that risk exists whenever interest rates rise.
How to reduce the risk
- Read your loan documents and ask the lender in writing for consent to the transfer.
- Consider buying new property in the LLC from the start, when financing allows.
- Understand that a personal guarantee on a loan to an LLC can reduce the liability benefit. See personal guarantees.
- For existing loans, weigh the risk of leaving title in your name against the risk of a call.
Other items to check
- Title insurance. Ask whether the policy continues for the LLC or needs an endorsement.
- Property insurance. Update the named insured.
- Leases and contracts. Assign them to the LLC.
- Taxes and registration. Update the account with the appraisal district and utilities.
Where it fits
An LLC for rentals is a standard part of asset protection planning, usually combined with insurance. It works best when the entity is set up before the property is bought. See transferring property into an LLC for the mechanics and protecting rental property from lawsuits.
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Book Free ConsultationFrequently asked questions
Will my lender call the loan if I transfer to an LLC?
It has the right to under the due-on-sale clause. Many do not, but you cannot count on that.
Can an LLC hold my homestead?
No. A homestead exemption requires an individual owner.
Do I need a separate LLC for each property?
Not required, but separate entities keep a claim on one property from reaching the others.
Is there a tax difference?
A single-member LLC is generally disregarded for income tax, so the tax result is often the same as personal ownership.