Some individuals and couples transfer title of real property to an LLC as a way to shield them from personal liability, pay fewer taxes through asset depreciation, avoid probate, or for estate planning purposes. Some of these purposes are succession planning, gifting, or lowering estate taxes. Perhaps, the property is an in-town rental, vacation home, out-of-state property, or vacant land; placing the property into LLC can protect the property owner, lessen the tax burden, and streamline probate process.

An LLC provides pass through taxation in the same manner as a sole proprietorship or a partnership. Creating an LLC is not, however, an income tax avoidance strategy. Although in some circumstances, taxes may be deferred, taxes which are owed will be due at a later date.

If you have a rental property, and you own the property solely or in joint tenancy, below are the steps to form an LLC. Once the LLC is formed, you can transfer the property into that business entity. On the other hand, the process for a multi-member LLC is more complex. You should absolutely consult with an attorney before undertaking such an endeavor. 

Step 1: Contact Your Lender; Contact Your Title Insurance Company; Contact Your Homeowners Insurance Company
If you don’t own your property outright, the first thing you should do is call your lender. Depending on the terms written in the lending document, if you transfer the property to an LLC, the lender may call in the loan.

A transfer is considered a sale, and you will be responsible to pay the remainder of the loan. Sometimes the lender will want to refinance or renegotiate your loan, with closing costs and points. Alternatively, the lender may want to write you a brand new loan.  If your loan document is silent, or doesn’t prohibit you from moving your property into an LLC, and you are sure the lender will not call the loan in then you can proceed to create your LLC.  Often, the lender is only concerned whether you continue to make payments, especially when the members of the LLC are the signatures to the loan.

You will also need to contact your the title company that originally insured your transaction to inform them that you are moving the title of the property to a business entity. You may have to get a rider that will can endorse or expand your policy to include your LLC, since that entity will be the new title owner.  Since the title insurance is in your name(s) if the title changes  names even if you are the sole owner of the LLC, the title insurance can deny you coverage.

Likewise, change the insured on your homeowners policy, for the same reason above. Insurance companies won’t check up on you, they’ll just deny the claim. Cover your bases before you start.

Step 2: Create an LLC and Maintain Corporate Formalities
To create an LLC in Colorado, you will need to file articles of incorporation with the secretary of state and draft an operating agreement. It’s important to follow the rules and requirements regarding these two documents. Additionally, you will also need to follow corporate formalities during the operation of your new LLC. Some of these formalities include having meetings, keeping and maintaining minutes of these meetings, and signing all contracts in the name of the LLC.

Step 3: Open a Bank Account in the Name of the LLC
The easiest way for members to lose the personal liability protection provided by the LLC is to commingle funds. You must open up a checking account in the name of the LLC and deposit rents into this account. Use the funds in this account to pay the mortgage, HOA fees, and other costs that are incidental to maintaining the premises. Whatever is left over, write a check and pay yourself. What you pay yourself is considered taxable income. Don’t run the LLC, “out of your back pocket”, and don’t commingle funds.

Step 4:  Fill Out and Record Deed
After filing articles of incorporation, drafting an operating agreement, and opening up a banking account in the name of your LLC, you will need to go down to the county clerk and recorder and file either a quit claim, or warranty deed to transfer the property to your LLC.

A quit claim deed does not guarantee that the property is free and clear of liens and encumbrances. Conversely, the warranty deed states that the property is free and clear of all liens.

Before you record your deed, contact your lender, title-insurance company and homeowners insurance company.  The bank and insurance companies may require you to file a warranty deed.  A warranty deed is always safer to file, sometimes a quit claim deed is appropriate.

Step 5: Change the Lease
The final step in the process is changing the lease. You will need to replace your name(s) with the name of the LLC. Therefore, you will need to draft and sign a new lease. Finally it’s important to sign will need to sign the lease, and all your documents, the following way: [your name], managing member of [name of LLC].

Owning property through an LLC will protect your personal assets from potential tort claims that can occur on your property.  Real property owned in an LLC can easily be transferred to a beneficiary avoiding probate, and depending upon your estate there may be tax benefits as well.

If you are considering moving your rental property into an LLC please contact my office at (303) 900-2529 or email me at paul@pmillerlawoffice.com for a free consultation.

This article is for informational purposes only and does not constitute legal advice about your case or situation. There may be exceptions to the information outlined above. Please consult an attorney if you have specific questions about your real estate or rental property.