By: Will Van Vactor
This blog post outlines the basic procedure for transferring investment properties, such a rental houses, into a limited liability company ("LLC"). First, though, a note about why people transfer investment properties into LLCs. The primary reason is to limit personal liability. Let's say a tenant falls and injures herself on your property. If her injuries are bad enough, she may look to the property owner for reimbursement. If the property is owned by you personally, all of your personal assets might be at risk.
Transferring property to an LLC helps avoid that risk because the property is owned by the LLC. In theory, the risk is limited to the assets of the LLC. As a side note, landlords should also have adequate liability insurance to help limit financial risk.
So, how do you transfer investment property to an LLC?
First, if you have a mortgage on the property, talk to the lender. Most loans include a due on sale clause. This clause may be triggered by the transfer of the property to an LLC. If the lender wants to enforce that clause, it can call your loan. The lender may ask you to sign a personal guaranty or take other action so that the lender is not disadvantaged by the transfer.
Second, you need to form an LLC. In Oregon, to do this, you need to file Articles of Organization with the Secretary of State. The charge is around $100.00. Note, you will also have to pay an annual renewal fee. You should talk to your lawyer about whether you need an Operating Agreement for the LLC..
When you talk to your lawyer, ask for information about what you need to do to maintain the necessary "corporate formalities" (such as opening a separate bank account, changing the lease so the landlord is the LLC, writing checks for LLC matters from the LLC bank account, etc.). If you fail to maintain the necessary corporate formalities, all your work transferring the property to the LLC may be for naught.
Third, you need to transfer the property to the LLC. This is accomplished by signing, notarizing and recording a deed. What type of deed (such as warranty deed or bargain and sale deed) you should use is something to discuss with your lawyer.
To take advantage of the liability protections an LLC can afford (and to find out if it is right for you in the first place), talk to your lawyer. Every case is different, so what is right for one property owner may not be right for another.
Will Van Vactor is the founder of Van Vactor Law LLC. Will is an Oregon attorney. His practice focuses on land use, real estate, and mediation. You can reach him at [email protected] and 541-233-8517.
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