Why You Shouldn’t You Place Your Home in an LLC?
Transferring your real property and other assets into an LLC can be a sensible planning strategy that establishes anonymity and liability protection. However, when it comes to your personal residence, this type of planning structure is not typically recommended. By titling your home in the name of your LLC, you risk certain adverse tax consequences, problems with insuring your home, and costly LLC maintenance fees.
Capital Gain Tax Exemptions for Primary Residences
Homeowners can take advantage of many tax deductions and exemptions in California. However, once you place your primary residence into an LLC, you risk foregoing many of these tax benefits, especially with respect to capital gains tax.
Capital gains tax exemptions become effective when you sell your home for a profit. Capital gain is the difference between the value of your home when you bought it to the value when you sold it. The Internal Revenue Code section 121 permits a taxpayer to exclude up to $250,000 ($500,000 for married couples filing jointly) of the gain from the sale of property owned and used as a principal residence. This means that if, as a married couple, you purchased your home for $500,000 and sold your home for $800,000, you would have a zero capital gain tax liability and you could keep these profits without any tax obligation.
Once you place your personal residence into an LLC, the property ownership structure changes under the IRS. Thus, by doing this, you lose out on qualifying for the capital gain tax exemption. Under the previous example, if you placed your primary home into an LLC, upon the sale of the property, you would be liable for nearly $300,000 in capital gains taxes. Clearly, as a homeowner, you would not want to trigger this burdensome tax liability, and therefore, it is not advisable to place your home into an LLC for this reason.
Homeowner’s Insurance Risks
In addition to experiencing certain tax consequences, placing your home into an LLC may also prompt potential issues when it comes to your homeowner’s insurance. If you are not careful in transferring your homeowners insurance policy to the name of your LLC, then your insurance may be invalidated and your insurance company would have grounds for denying your claim.
When you closed on your home, you likely insured the property under your own name. If you then later transfer the property to your LLC, you would need to execute a brand new policy in the name of your LLC. It is extremely easy to forget to do this, especially if you are undertaking and navigating this LLC transfer on your own.
If you transfer your residence to an LLC and fail to update your insurance policy, then any claims for damages may be denied by your insurance carrier. This is because the claim would be filed under your LLC (the legal title holder) and there would exist a major discrepancy between the individual actually insured under the policy and the claimant. This could all be avoided by planning appropriately and prudently.
When to Place Your Property Into an LLC
While LLC ownership can be extremely effective and beneficial for rental or income property, the same cannot be said when it comes to your home. As previously discussed, there are many negative tax consequences and potential for insurance risks when you transfer ownership of your home to an LLC. This type of transfer could cost you thousands of dollars, and may not provide the protection you initially intended.
If you’re considering an LLC ownership structure for your home, then I recommend you speak with my office to discuss your personal needs and other circumstances. There are a multitude of other ownership structures which provide anonymity and liability protection that may be much more practical for you and your situation. Please contact my office at (310) 800-2911 to learn more about your options as a homeowner in California.
Several factors determine whether you should put your rental property in an LLC, including the impact on your taxes, potential liability exposure, and your lender’s willingness to approve a transfer.
However, it’s not generally recommended that someone put their house in an LLC.