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Transferring Real Estate to an LLC
Transferring real estate to an LLC is a prudent strategy mainly because an LLC (1) protects the LLC’s assets from the creditors of its members (i.e., owners) and (2) shields the LLC’s members from liabilities associated with real estate ownership, such as injuries or deaths occurring on the property.
Mortgage Issues
If you have an outstanding mortgage on a property that you intend to transfer to an LLC that you own, there are a few issues (described below) that you should be aware of. If you own a property free and clear, you do not need to worry about the following issues.
Mortgage Due-on-Sale Clause
Virtually every Deed of Trust (aka Mortgage) has a clause that gives the lender the option to accelerate the mortgage if the borrower sells or transfers the property without the lender’s written consent. This clause is often referred to as the “Due-on-Sale Clause” and is typically located in Section 18 or 19 of the standard Deed of Trust. Ideally, you would simply request and receive the bank’s consent before transferring the property to your LLC. Some banks, however, will not consent.
If you cannot obtain the bank’s consent to transfer the property, you are left with a choice: (1) proceed with the transfer to get the benefits of using an LLC to hold real estate and risk a subsequent acceleration of the mortgage by the bank or (2) abandon the transfer and the benefits of holding real estate in an LLC.
Mortgage Payments
When transferring a property to an LLC, only the property itself is transferred, not the mortgage. If the LLC assumes the mortgage, it will be responsible for paying it. Alternatively, if the property is transferred to the LLC "subject to" existing liens, the borrower can either (a) pay the mortgage and be reimbursed by the LLC or (b) have the LLC pay it directly.
Mortgage Assumption vs Subject to
Unless stated otherwise in the deed, an LLC acquires the property "subject to" existing debts and liens, such as the mortgage. However, the LLC can explicitly assume the mortgage if specified.
Insurance Issues
Transferring real estate to an LLC may cause issues with your existing insurance coverages. Here are the most common types of coverage and the steps you should take after making the transfer.
Title Insurance
If you closed at a title company when you originally purchased the property, you almost certainly purchased title insurance. Title insurance is a type of insurance policy that protects a property owner from financial losses related to defects in a property's title (i.e. if someone claims to be an owner of the property). The title policy remains in effect as long as the policyholder retains an interest in the property. If the policyholder (you) transfers the property to an LLC, the title policy is likely nullified unless the policy states that the term “Insured” also includes an entity that is wholly owned by the named Insured. You may be able to convince the title company to add the LLC as an additional insured on the original policy.
Property Insurance
A property insurance policy covers damages to a property from fire, vandalism, storms, and other covered perils. If you transfer a property to an LLC, you should add the LLC as an additional insured on the existing property insurance. If you have a mortgage, the mortgage company will require that you maintain property insurance to protect their collateral.
Landlord's Insurance
A landlord's insurance policy covers a rental property owner from tenant’s claims. If you transfer a property to an LLC, you should add the LLC as an additional insured on the existing landlord’s insurance policy. If you do not have one, we recommend that you consider purchasing a landlord's policy to protect the property from such claims.
Homestead Issues
In Texas, transferring one’s homestead (primary residence) to an LLC is generally not advisable for several reasons:
- Loss of Homestead Exemption. Under Texas law, a homestead owned by an individual enjoys significant protection from creditors. However, if the property is transferred to an LLC, it loses its homestead status and the associated protections.
- Loss of Property Tax Discount. Homesteads in Texas often qualify for a property tax discount. Transferring the property to an LLC can result in the loss of this discount.
- Loss Capital Gains Tax Exemption. When an individual sells a primary residence, they may be eligible for a capital gains tax exclusion on up to $250,000 of profit ($500,000 for married couples). This benefit is not available if the property is owned by an LLC.
- Higher Interest Rates. Mortgage lenders typically offer more favorable terms for loans on primary residences compared to investment properties. Transferring a homestead to an LLC may complicate financing and result in higher interest rates and less favorable loan terms.
- Loss of Homestead Protections in Bankruptcy. Texas provides strong protections for homesteads in bankruptcy proceedings. These protections may be compromised if the property is transferred to an LLC.
Types of Deeds
General Warranty Deed
A General Warranty Deed (GWD) transfers property with a full warranty of title that covers the entire history of the property. A GWD is typically used when transferring a property to an LLC.
Special Warranty Deed
A Special Warranty Deed (SWD) transfers property with a partial warranty of title, covering only defects that arose during the seller's period of ownership.
Deed without Warranty
As the name implies, a deed without warranty comes with no warranties of title. The seller (grantor) transfers whatever interest they have in the property, if any, without any promises about the title's validity. A Deed Without Warranty is used in settlements, foreclosure sales, etc.
Quitclaim Deed
A Quitclaim deed is similar to a Deed Without Warranty. Since Quitclaim deeds cause title issues in Texas, they are rarely ever used in Texas.
Timing of Transfer
When transferring real estate to an LLC for asset protection purposes, it is crucial to complete the transfer before any lawsuit is filed or even threatened. Transferring property to hinder a creditor can be deemed fraudulent and may ultimately fail to protect the asset, allowing the creditor to reclaim the property.
Post-Transfer Tasks
Update Insurance
The new owner (the LLC) should be added as an additional insured on existing insurance policies.
Update HOA
If the property is in a neighborhood with an HOA or property owners’ association, you will want to update the association in accordance with the bylaws.
Update Lease
If the property is leased, an Assignment and Assumption Agreement should be executed to assign the lease rights to the LLC and have the LLC assume the lease obligations. Alternatively, the lease can be amended to substitute the old landlord with the new landlord. A lease amendment requires the tenant's signature, whereas an assignment only requires notifying the tenant of the assignment after complete.
Frequently Asked Questions
How would I transfer a property out of an LLC?
Transferring property out of an LLC requires a simple deed signed by the LLC’s members (or managers if the LLC is manager-managed). Alternatively, the deed can be signed by a single authorized representative after the LLC’s members (or managers if the LLC is manager-managed) sign appropriate resolutions authorizing the sale.
Should a spouse sign a deed even if they are not an owner?
If the property is occupied by both spouses, then both spouses need to sign the deed even if only one of the spouses owns the property. If the property is not occupied by the spouses, it is still recommended that both spouses sign the deed (or a non-homestead affidavit). Texas is a community property state, and any property acquired during the marriage (unless inherited) is presumed to be community property; therefore, even a non-owning spouse may have a community property interest that needs to be conveyed. If the property was acquired before the marriage or by inheritance, or if the property was explicitly acquired as the separate property of one spouse, then the spouse’s signature is not required. We recommend that both spouses sign every deed to be safe. The non-owning spouse would sign with the following footnote: Although not a record owner of the Property, the Grantor’s spouse is signing this deed pro forma to consent to the transfer of the Property to the extent the spouse has a community property interest therein.
What happens after a deed is signed?
After a deed is signed, it should be recorded at the county level.
How would I transfer a property out of an LLC?
Transferring property out of an LLC requires a simple deed signed by the LLC’s members (or managers if the LLC is manager-managed). Alternatively, the deed can be signed by a single authorized representative after the LLC’s members (or managers if the LLC is manager-managed) sign appropriate resolutions authorizing the sale.
Where is a deed recorded?
In Texas, deeds are recorded in the County Clerk's office in the county where the property is located. The larger counties will allow e-recording, but some smaller counties still require the original deed with actual wet signatures.
Does deeding property to an LLC provide a level of privacy?
Asset protection and limited liability offered by an LLC are important, but there are other benefits, including privacy (anonymity for the LLC’s owners) in some circumstances.
Zachary Copp, Esq.
Mr. Copp is a graduate of the University of Texas at Austin and the founder of the Copp Law Firm. He has been licensed in Texas for 20 years and has personally formed over 3,500 Texas LLCs since 2015. He was recognized as a Rising Star by SuperLawyers® for seven straight years. See full bio →