Can you put a house with a mortgage in an LLC?
Yes, you can put a house with a mortgage in an LLC, but you should take steps to ensure that this action will not trigger the “due on sale” clause in your mortgage.
Why would I want to move a house into an LLC?
LLCs provide an asset protection, often making them the ideal owners of investment or rental real estate. Imagine that someone trips on a loose brick that somehow fell into your lawn. After tripping, the person falls hard onto a step, resulting in paralysis from the neck down for the rest of their life. That person now sues you, the owner of the property, for the damages, including the medical bills, lost wages, and all the pain and suffering. This is the kind of risk you take by owning property in your own name. If someone is injured on the property, you as the owner will often be liable for that injury. However, if the property is owned by an LLC, then claims like the one described above would go to the LLC, not you personally.
Simply put, the LLC puts up a legal barrier between your assets and most lawsuits. The person suing can get to the LLC assets, but not your personal assets or the assets in other LLCs that you own. Thus, it makes a lot of sense to put each investment or rental property you own into a separate LLC. If you do, then a person suing will be limited to the assets of a single LLC and will not be able to reach all of the other assets you have. It also means that a person injured at one rental property cannot sue to get a lien on one of your other properties. Each property is protected from claims against the others, and you are protected from claims against all of them.
LLCs are also useful because the operating agreement of an LLC can be used to avoid the probate process in Florida. In other words, LLCs provide good asset protection and an estate planning benefit at the same time. This means that if you have rental properties in Florida, it might be worth speaking with a lawyer about moving those properties into LLCs.
Will moving a house into an LLC trigger the “due on sale” clause?
Moving a house into an LLC could trigger the “due on sale” clause in your mortgage, but most likely will not as long as you stay up to date on your payments.
Your mortgage almost certainly contains a “due on sale” clause. That clause states that if you transfer the property to someone else, your lender is allowed to call the full balance of the loan and require you to pay the entire amount back immediately. In other words, the loan is due upon the sale (or other transfer) of the property, which is why we use the term “due on sale.” This clause is typically not a problem for borrowers, as they would only transfer the property to someone else if that person was buying the property. However, transfers into an LLC are technically transfers to another legal entity, meaning they fall within the scope of a “due on sale” clause.
However, there are two good reasons that most people should not fear the “due on sale” clause. The first reason is that the clause is often only enforced on mortgages that are past due. Lenders have little motivation to call a loan that is being paid as agreed. Many lenders would rather not mess with a good thing, even if there was a transfer into LLC that technically gives them the option to call the loan. It often just makes better business sense to let you keep paying the mortgage as originally planned.
The second reason is that most mortgage lenders do business with either Fannie Mae or Freddie Mac, and that means those lenders are bound by either the Fannie Mae guidelines or the Freddie Mac guidelines, and both sets of guidelines are friendly to transfers into LLC. Subsection D1-4.1-02 of Fannie Mae’s Servicing Guide states that transfers to LLCs do not trigger the “due on sale” clause provided that “the mortgage loan was purchased or securitized by Fannie Mae on or after June 1, 2016, and the LLC is controlled by the original borrower or the original borrower owns a majority interest in the LLC, and if the transfer results in a permitted change of occupancy type to an investment property, such change does not violate the security instrument (for example, the 12 month occupancy requirement for a principal residence).” In other words, as long as (1) the loan was secured by Fannie Mae after June 1, 2016, (2) the LLC is owned by and controlled by the current owner the property, and (3) the transfer does not change the property from a personal residence to an investment property, the due on sale clause is not triggered in the Fannie Mae loan. Similarly, section 8604.4 of the Freddie Mac Seller Servicer Guide gives the same standard, but without the 2016 requirement, meaning it applies to all Freddie Mac loans.
The best practice though is to simply contact your mortgage company and see if the company has any objection to your plan.
Will moving a house into an LLC result in documentary stamp taxes in Florida?
Unfortunately, a transfer of a Florida property with a mortgage into an LLC will result in documentary stamp taxes. Generally, documentary stamp taxes are assessed in Florida whenever a transfer of real estate occurs for consideration. “Consideration” means the amount paid for the property, including the amount owed on the mortgage on the property. Thus, even if you do not get paid to transfer the property to someone else, there is still a tax on the amount still owned on the mortgage.
In addition, there is a possibility of paying documentary stamp taxes all over again if the LLC is sold within three years of making the real estate transfer. This comes up when (1) the mortgage on the property is less than the value of the home (in other words, you’ve built equity in the property), (2) the owners of that LLC are identical to the prior owners of the real estate (for example, you are the sole owner of the property and the sole owner of the LLC), and (3) the LLC is sold to a third party within three years of making the real estate transfer. If all of these boxes are checked, documentary stamp taxes will also be due at the time of the sale of the LLC to a third party. This is laid out in section 201.02(1)(b) of the Florida Statutes and in Fla. Admin. Code § 12B-4.060(9)(f).
Final Thoughts
Moving real estate into an LLC is complicated, and there are a number of considerations to think through before acting. In some cases, it may make sense to do nothing or to move the house into a trust instead. If you have Florida property that you think should be deeded into an LLC, speak with a Florida attorney first. Your real estate is far too valuable to cut corners with the legal work.