Should You Transfer Real Estate Into an LLC?

There are several factors to consider when deciding whether transferring your rental real estate into a Massachusetts Limited Liability Company (LLC) makes sense for you.

Here are a few key considerations:

1. Liability Protection

Advantage: One of the primary reasons people transfer rental real estate to a LLC is to protect personal assets from creditors. Typically, creditors of the LLC are limited to recovering against LLC-owned assets, and cannot reach personal assets of the owner.

Consider: LLCs must be properly formed, insured, and maintained in order for LLC members to benefit from liability protection. There are ongoing expenses and reporting requirements for LLCs in addition to initial setup costs.

2. Tax Implications

Advantage: LLCs offer flexible tax options. By default, an LLC is a pass-through entity, meaning profits and losses pass through to the owner’s personal tax return.

Consider: Consult with a CPA or other tax professional to understand how creating a LLC and transferring your real estate will affect your specific tax situation. There may be factors other than liability protection that affect your decision making.

3. Financing and Mortgages

Advantage: Having an LLC can make it easier to separate business and personal assets and finances. It can also allow multiple individuals to combine resources and obtain financing to invest as a group.

Consider: LLCs are considered legal entities separate from their owners, and are typically subject to less-desirable commercial loan rates. Many landlords have an existing residential mortgage attached to their rental property that would have to be refinanced as a more expensive commercial loan upon transfer of the property to the LLC.

4. Estate Planning Issues

Advantage: An LLC is a separate legal entity that can provide liability protection and efficiently transfer business assets to successive generations.

Consider: LLC membership interests do not transfer automatically & require additional long-term planning that must be coordinated with other non-LLC assets. Work with an estate planning lawyer to ensure the LLC is structured and maintained in a way that meets your long-term goals.

5. Summary

Transferring real estate into an LLC can provide significant benefits, including liability protection and tax flexibility. However, LLCs require ongoing maintenance, so it is important to consider the costs, administrative responsibilities, and potential impact on your financing options. Consult directly with your legal and financial advisors to see if an LLC makes sense for your situation.