Transferring Property into an LLC: What if There is Debt on the Property?

LLC Investor Resources

Attorney Nate Gilbert

Property you already own can be moved into an LLC, subject to some limitations and conditions.  If you have property that you would like to move into an LLC, consulting with an attorney is a good consideration, but before you do that, here are some things to consider regarding existing debt on a property being transferred to an LLC

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Holding property in an LLC is common for farms and ranches in Texas, except where Homestead Exemptions are taken on property containing the family homestead.

If your property has an existing mortgage or note, make sure to look at the “acceleration clause.”  Basically, if you have a third party that holds the lien on the property, they may have put in the mortgage or promissory note securing their interest in the property that the entire amount still due on the note would be due in full at the time of any sale or transfer.  Usually, this is not an issue for larger banks when their homeowners want to transfer their property into their personal LLC.  However, you should absolutely call your mortgage servicer or note holder and ask what their reaction will be—You do not want to find out that the lien holder has exercised their right to accelerate the debt after you have done the transfer.

Does A Deed Have To Be Recorded In Texas To Be Valid? CLICK HERE

If there is existing debt on the property and the lien holder does not object to the property being transferred to your LLC, there is a consideration of whether the transfer documents should say that the LLC is taking the property “Subject to” the existing debt or will be “Assuming” the debt.  Taking a property “subject to” the existing debt implies that the entity receiving title (your LLC) is making no promises to either the seller or the lien holder to pay the existing debt. This can be a significant consideration from a tax perspective to both the individual doing the transferring as well as the LLC.  Assuming the lien means that the LLC will take on the obligation of paying the debt from the seller.

Need An LLC Formed For Your Property? CLICK HERE

Holding property in an LLC is common for farms and ranches in Texas, except where Homestead Exemptions are taken on property containing the family homestead.

Forming the LLC

  • Choose a Business Name and File the Certificate of Formation:  The first step in transferring property to an LLC is to form the LLC itself. Choose a name for your LLC and file the Certificate of Formation with the Secretary of State. This document officially establishes your LLC as a legal entity.
  • Obtain Necessary Licenses and Permits: Depending on your state and local regulations, you may need to obtain specific licenses or permits to operate your LLC. Research the requirements in your area and ensure you have all the necessary licenses and permits before proceeding.
  • Create an Operating Agreement: Your Operating Agreement outlines the ownership structure, management responsibilities, and operational procedures of your LLC. It’s a crucial document that helps protect your limited liability status and outlines how the LLC will be run. Want to learn more about forming a series LLC? Learn more.

Transferring Property to the LLC

  • Obtain a Property Appraisal To properly transfer property to your LLC, you’ll need to have the property appraised to determine its fair market value. This value will be used for tax purposes and to ensure proper documentation.
  • Prepare a Deed for Property Transfer: Work with a real estate attorney or title company to prepare a deed that transfers ownership of the property from you (or your current ownership structure) to the LLC. The deed should clearly state the LLC as the new owner of the property.
  • File the Deed with the County Recorder’s Office Once the deed is prepared, file it with the county recorder’s office where the property is located. This officially transfers ownership of the property to your LLC.
  • Update Property Insurance and Other Documentation After the transfer is complete, update your property insurance, mortgage documents (if applicable), and any other relevant paperwork to reflect the LLC as the new owner of the property.

Exploring Tax Implications of Transferring Property to an LLC

Potential Tax Implications

  • Transfer Taxes In some states, transferring property to an LLC may trigger taxes or other fees. It’s important to research the specific requirements in your state and factor in these potential costs.
  • Basis Adjustment When transferring property to an LLC, the tax basis (the cost used for calculating depreciation and capital gains) of the property may need to be adjusted. This can have implications for future tax calculations.
  • State-Specific Tax Considerations Tax laws and regulations related to LLCs and property transfers can vary from state to state. It’s crucial to consult with a tax professional familiar with the specific laws in your state to ensure compliance and to maximize any potential tax benefits.

Seek Professional Advice

The tax implications of transferring property to an LLC can be complex and depend on various factors, such as your specific business structure, the type of property, and your state’s laws. It’s highly recommended to consult with a qualified tax professional or attorney to ensure you fully understand the tax consequences and follow all necessary procedures correctly.

If you can, paying off the note prior to transfer can speed up and simplify the deeding of the property to the LLC.  Attorney Nathaniel Gilbert in San Antonio assists clients in transferring property to their LLCs, or acquiring property in an already existing LLC.  If you would like to schedule a consultation with an attorney, Click here.

Nathaniel Gilbert

Nathaniel Gilbert is the sole attorney at The Law Office of Nathaniel Gilbert, PLLC. Practicing in the areas of Business Law, Nate assist clients with LLC formation and drafting contracts in the states of Texas, Colorado, and Kansas. He can be reached at 726-999-0087.