Transferring Your Investment Property Into a Nevada LLC
It seems like everyone you talk to these days is buying an investment property in Southern Nevada, due to the continually low cost of residential real estate. Institutional and wealthy investors are expending large sums on these endeavors and are keeping inventory levels of residential homes on the market at lower levels.
A question we are repeatedly asked – for good reason – is whether one should purchase such an investment property through the use of a Nevada limited liability company (“LLC”), or, more commonly, whether someone who already owns an investment property should transfer it into an LLC for asset protection and other purposes. These are fact-specific questions that require consultation with an attorney.
Our law firm has been forming LLCs for many years, and recommends the use of this entity type for many reasons. They are relatively inexpensive to form, they are easy to maintain (i.e., there are fewer corporate formalities required with the LLC than with a traditional corporation) and they provide excellent asset protection benefits when properly set up and utilized (see our companion article entitled “Maximizing the Asset Protection Benefits of a Nevada Corporation or Limited Liability Company” at www.albrightstoddard.com under the “News” tab).
That said, one should not attempt to handle the transfer of residential property into an LLC without the guidance and involvement of an experienced real estate and LLC attorney.
Here are three reasons why:
1) Ownership Transfers Often VOID Insurance Policies
The title insurance policy you purchased when you acquired your residential property was very likely a good policy of title insurance. Title insurers are more likely to give residential purchasers excellent title insurance policies because of the lower risk involved in insuring title to property within a residential subdivision, than they are with commercial properties or vacant land. As a result, your residential title insurance policy likely has far greater coverage benefits than are available in a standard commercial title policy.
What most people considering a transfer of their property into an LLC do not realize is that title insurance policies are very often voided entirely by the transfer of the property into the LLC. This means that if a title claim should arise (i.e., there is a lien or other encumbrance, or boundary dispute or encroachment you did not know about, or worse, someone else has rights to your property) you could be left entirely without coverage for this claim. This would be a complete disaster, and, unfortunately, a sad irony when the purpose of using the LLC in the first place was to protect yourself – not lose valuable protection afforded by insurance. An attorney can help you resolve this issue by helping you adopt the best strategy to retain your existing coverage after the transfer.
On the topic of insurance, one thing the property owner should always remember to do is to consult with its insurance broker to ensure that all property and liability insurance coverages will continue to insure the LLC following the transfer.
2) Financing Options Complicate Matters
Financing is another consideration. If you own the house outright, this is not a concern. If there is any financing on the home, however, the transfer of your property into an LLC will almost certainly be deemed to be a transfer, triggering a “due on sale” clause in the residential mortgage or deed of trust. This means your lender could demand that you pay your loan in full upon transfer of the property, including a possible prepayment penalty – after all, your property is now owned by a different legal “person”, which can make a bank very skittish about what you are up to.
These issues can be resolved, and should be handled with the involvement of an attorney who understands these matters.
3) Limit Your Transfer Tax Exposure
Finally, the last thing you want to do is pay more taxes just because you are trying to protect your property investment. The Clark County real property transfer tax is a local tax imposed by state law that is applied any time a deed is recorded transferring property from one person or entity to another. The “quitclaim” of your property into an LLC will require you to record a deed, which will obviously involve scrutiny of the transaction to determine whether a tax is owed. Since the tax is based on the value of the property, this can be a real concern, especially since the tax is usually hundreds of dollars. There are exceptions to this tax payment requirement, however, under specific circumstances, such that many transfers of property into an LLC can be done without paying it altogether. An attorney can review your transaction to make sure you are not running into a tax problem.
The law firm of Albright, Stoddard, Warnick & Albright is well-prepared to assist you in creating your LLC, getting your property properly transferred into your LLC, and avoiding the pitfalls described above.
Due-on-sale clauses and due-on-transfer clauses are regulated by the federal Garn-St. Germain Depository Institutions Act of 1982. Generally, the Garn-St. Germain Act prohibits a lender from calling the loan due if the transfer is for estate planning purposes. As a result, in some instances, the transferor may want to create a simple land trust, then deed the property to the land trust. The LLC will then be the owner of the beneficial interest in the trust.
About the Authors: The law firm of Albright, Stoddard, Warnick & Albright is an A-V Rated Nevada-based full-service law firm having attorneys licensed in Nevada, California and Utah. Our firm’s practice includes a strong emphasis on corporate and business law, including advising businesses from start-ups to well-established companies in the jurisdictions where we are licensed.
Note: This article, and any other information you obtain at this website, is not offered as legal advice, nor should it be relied upon as such, nor is it a solicitation for legal services. Only a licensed attorney can advise you with respect to your specific legal needs. We welcome your contacting our firm to discuss such representation. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.