When to Consider Using an LLC to Own Real Estate – Courtesy of Christian Ross with Ross Title and Escrow
If you spend any time online researching real estate, you’ll find no shortage of advice encouraging investors and homeowners to put their property into a Limited Liability Company (LLC). While LLCs can be a powerful tool for asset protection and management, they’re not a one-size-fits-all solution. In fact, in some cases, transferring property into an LLC can create more problems than it solves.
The key is understanding when an LLC is appropriate — and when it’s not.
When an LLC Makes Sense:
1. Owning Property with Partners
One of the best uses of an LLC is when multiple people own real estate together. Without an LLC, each co-owner holds an undivided interest in the property, which can expose the asset to personal lawsuits or creditor claims against any one of the owners. By placing the property into an LLC, ownership is consolidated within the company, and judgments against an individual partner generally cannot attach to the real estate itself. This protects the investment and keeps disputes separate from personal liabilities.
Pro Tip: Form the LLC in the state where the property is located — or where the owners are residents. Using a “foreign LLC” (an out-of-state company) can add unnecessary layers of registration, taxation, and confusion during the sale process. Keeping it local keeps it simple.
2. Rental and Investment Properties
LLCs are also a strong option for rental or income-producing properties. Rental properties carry inherent liability risks — tenant injuries, property damage, or disputes that can lead to lawsuits. Holding these properties in an LLC creates a liability shield between the business of managing rentals and the owner’s personal assets. This means that if the LLC is sued, the owner’s home, savings, and other personal property are generally not at risk.
Pro Tip: The liability shield only works if you treat the LLC like a real business. That means opening a dedicated bank account, keeping separate books and records, carrying proper insurance, and ensuring all leases and transactions run through the LLC — not you personally. Mixing business and personal funds is one of the fastest ways to lose the protection an LLC provides.
When an LLC May Not Be the Right Choice:
1. Primary Homestead Properties
In states like Florida and others with strong homestead protections, your personal residence already carries significant legal shields against creditor claims. Transferring your homestead into an LLC can strip away those protections and, in some cases, cause tax complications or even disqualify you from homestead-related exemptions. For most people, putting their personal home into an LLC creates more risk than reward.
2. Properties with Existing Mortgages
If you already have a mortgage on a rental or investment property, moving the title into an LLC may trigger the lender’s “due on sale” clause, effectively calling the loan in full. Lenders typically approve loans based on the individual borrower’s creditworthiness, not an LLC. Unless you refinance into a commercial loan or obtain lender consent, transferring a mortgaged property into an LLC could jeopardize your financing and lead to foreclosure.
Understanding the Costs:
Before forming an LLC for real estate, it’s important to understand the costs involved. While they vary depending on the situation, here are the most common expenses you should consider:
Formation Costs: In Florida, the filing fee with the Secretary of State is currently $125.
Annual Registration: Each year, LLCs must file an annual report with the state, which in Florida is $138.75.
Insurance Premiums: Some insurers charge higher rates for properties owned by an LLC versus an individual.
Tax Compliance: Depending on how your LLC is structured, there may be additional tax filing requirements and costs, especially if the entity is not treated as a disregarded entity.
Operating Agreement: For multi-member LLCs, an operating agreement (essentially a partnership agreement) is highly recommended. Our office can prepare these tailored agreements to outline ownership rights, responsibilities, and exit strategies.
Transfer Taxes: If a property with a mortgage is transferred into an LLC, Florida charges $7 per $1,000 of the mortgage balance as documentary stamp tax. For example, a $300,000 mortgage would result in a $2,100 transfer tax.
Our office can assist clients in forming LLCs, drafting operating agreements, and navigating the tax and transfer requirements, ensuring the structure is both legally sound and cost-effective.
The Bottom Line
LLCs are a valuable tool for real estate investors, but they are not universally the “best” choice. They shine when used for partnership-owned real estate and rental properties without restrictive financing, but can backfire if used for personal homesteads or mortgaged investments without proper planning.
As with most legal and financial strategies, the right answer depends on your specific goals and circumstances. Before moving property into an LLC, consult with an attorney or qualified real estate professional to ensure the structure works for — not against — you.
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Christian Ross, Esq.
Ross Law | Ross Title | Ross 1031
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