Best Practices for Transferring Rental Properties into an LLC
As we enter 2022 with real estate prices still climbing at record-high rates and equity growing, folks are looking to invest their money into real estate. Some will purchase rental properties in their own names and live in them for two or more years before selling to take advantage of capital gains tax benefits plus equity. Others purchase with the sole intention of flipping or renting long-term. Either way, if an investor purchases in their own name and chooses a mortgage lender, they’re often looking at standard residential mortgages.
Many of these investors will then look into transferring the property into a single-member LLC. There are several benefits to this, such as anonymity, possible tax write-offs, and limiting their own personal liability from lawsuits by renters. However, if you are looking to start a single-member LLC and transfer your rental property into it, there are a couple of potential issues you need to consider.
Issue #1: Due on Sale Clause
First is the “due on sale clause.” A due on sale clause is standard in any residential mortgage contract, it gives the mortgage company the right to immediately accelerate the entire amount of the mortgage when the mortgagor sells, conveys, or otherwise transfers the property without the mortgage company’s consent. What many don’t realize is that this due on sale clause can be triggered by an investor transferring the property from his/her individual name to an LLC, which would render the entire mortgage amount due.
There are a few possible ways around triggering the due on sale clause for any property investor. First, if you have certain mortgages that are backed by Fannie Mae or Freddie Mac, they have released new guidelines that allow for transferring to an LLC without triggering the clause, these guidelines were released in 2017 and can be found here. Second, even if you have another mortgage lender, the best thing that an investor can do is simply ask your mortgage company and gain permission to transfer the property to the LLC without triggering the clause. Most mortgage companies have not been known to use this clause when transferring property to an LLC, so many investors can gain permission somewhat easily.
Issue #2: Check Your Title Insurance Prior
Another potential issue to watch out for is whether your title insurance would still be in effect if you transferred the rental property from your personal name to an LLC. This issue is trickier and may require you to look at what the definition of “insured” is on your title policy. Depending on the title company, you can see whether the “insured” definition is broad enough to cover any LLC that you may transfer to. For example, the language may say something along the lines of:
“(D) a grantee of an Insured under a deed delivered without payment of actual valuable consideration conveying the Title
(1) if the stock, shares, memberships, or other equity interests of the grantee are wholly-owned by the named insured,”
This would indicate you are still covered, even if you transfer to an LLC. To be even safer, there are endorsements that you can get on a title policy that will cover specifically a transfer to an LLC, called a 107.9 endorsement or 107.10 endorsement.
Michigan Rental Property Attorneys
If you’re looking to purchase an investment property or seeking to set up an LLC to transfer your property from your personal name, call Robert C. Pollock at Fausone Bohn, LLP today at (248) 912-3213. Robert is a dual-licensed attorney in Michigan and Arizona who concentrates his practice on Real Estate/HOA Law, Corporate/Business Law, and Municipal Law. Robert can help you make the most out of your real estate investment.