Moving real estate into a limited liability company (“LLC”) has significant advantages. Chief among them is limiting liability. However, there are cons to moving real estate into an LLC that you should know about:
- Attorney required for lawsuits – If you move your property into an LLC and a lawsuit is filed related to your property, then you will need an attorney to represent your LLC in court. You can no longer represent yourself pro se (without an attorney) when a lawsuit is filed related to your property. For instance, you can no longer prosecute evictions pro se.
- Insurance – You will likely need to obtain new insurance policies covering the property since the insured’s name will be changed to your LLC. Your insurance costs may go up. You may no longer be able to obtain liability insurance coverage that is coupled with hazard insurance coverage. Separate liability coverage will likely be more expensive. Your insurance costs will probably go up in general.
- Title insurance – It is possible that you could lose your title insurance coverage when transferring your property to your LLC. This depends on your title policy and whether your LLC is a single member LLC. Your title policy will need to be reviewed to see if your title policy will carry over from your individual name to your LLC.
- Taxes – Your tax liability may change depending on how your LLC is structured. If your LLC is a single-member entity, then your tax liability will likely not change. However, if the LLC is a multi-member entity, then it will be treated like a partnership for tax purposes and your tax liability may change as a result. You should consult a tax professional before moving real property into an LLC.
- Property taxes – Moving your real estate into an LLC may affect your property taxes, especially if the property is your homestead. You can contact your county property appraiser to inquire about how the valuation of your property might be impacted by moving your property into an LLC.
- Loss of control – With transferring your real property to an LLC, you may lose day-to-day control over the management of the property. Your level of control over the property will depend on the structure of the LLC. If the LLC is a single member LLC and you are the only member, then you would have total control over the LLC. If you have multiple members and managers who all have a say in how LLC business is conducted, then you may have less control over the property than you did when you owned it individually.
- Documentary stamp tax – At the time of transferring the property to an LLC, if the property is encumbered by a mortgage or money is changing hands as part of the transfer, the transfer to an LLC will require payment of documentary stamp taxes.
- Mortgage issues – Your lender will need to consent to your property being moved to an LLC. Many lenders do not like lending to an LLC and may object to the property being transferred to an LLC.
- Homestead – Moving your Florida homestead property into an LLC will result in you losing all Florida homestead tax exemptions and protections against creditors. The homestead protections are more powerful than those provided under an LLC. Therefore, in general, it is not recommended to move homestead property into an LLC unless you have a compelling reason.
- Obtaining a mortgage – It will become more difficult to obtain a mortgage and you will likely have a higher interest rate. If you move your real property into an LLC, then you cannot obtain a conventional FannieMae or FreddieMac mortgage.
- LLC formalities and annual fees – Depending on the structure of your LLC, it may not be as easy to sell or transfer your real estate, especially if you have multiple members that all need to agree. The sale or transfer of your LLC will require signing a resolution and/or LLC affidavit authorizing the sale/transfer of the property. And when you do sell your property, the proceeds from the sale will need to go to a bank account in the name of your LLC. You will need to file an annual report and pay an annual fee to keep your LLC active ($138.75 in Florida in 2023). You may also need to hire a registered agent, which costs about $100 a year.