Many private clients ask us whether it makes sense to own a home in a single-member limited  liability company (LLC), rather than, say, in their revocable trust or in their individual names.  (In community property states, a single-member LLC includes an LLC owned by a married  couple or by a revocable trust that, in each case, elects to be treated as a disregarded entity  for federal tax purposes.) While holding a home in an LLC creates some administrative burdens  and additional costs, it also offers several benefits.

Benefits of LLC Structure

Privacy. Home ownership in an LLC provides a layer of anonymity that many of our private  clients desire. In order to maximize this confidentiality, the name of the LLC should be generic,  and the address of the LLC and agent for service of process, both of which are available in the  public records, should not be easily traceable to the individual member. In addition, in some  jurisdictions, such as California, the name of the manager of the LLC (or if no manager, the name  of each of the members of the LLC) must be included in a Statement of Information filed with  the Secretary of State, which is also publicly available. (Delaware has no such requirement.)  Some private clients will appoint a trusted individual or family member with a different surname  as manager of the LLC to further shield the name of the ultimate owner. (The LLC operating  agreement can be drafted to minimize the manager’s powers and to allow the member to  remove the manager at any time and without cause.) For privacy purposes, it is better to own  a house in the name of the LLC from the date it is acquired, rather than transferring it into  an LLC later, because the deed transferring the property from an individual into the LLC is  a public record. Finally, it should be noted that a client’s revocable trust can be the member  of an LLC, and thus, upon the client’s death, the LLC interest would pass outside of probate  thereby providing an additional layer of privacy.

Gifting. Once a home is owned in an LLC, it may be advantageous for gift tax purposes  to convey minority membership interests in the LLC to family members. Gifts of minority  membership interests in an LLC can be discounted for valuation purposes, thus allowing the  gifting party to minimize use of his or her gift and estate tax exemption amount. This should be  coordinated with a trust and estates attorney and CPA and will require appraisals and potentially  a lease agreement whereby the LLC leases the house to the majority member (assuming that  member is occupying the house).

One other consideration in California is that Proposition 58, which excludes from property tax  reassessment transfers of primary residences between parents and children, would not apply  to transfers of LLC interests. Therefore, prior to gifting an LLC interest, the client must consider whether the gift would trigger a reassessment of the house.  (Typically, assuming the property was originally acquired by  the LLC, if the transfer does not result in a change of control  of the LLC, it would not trigger reassessment. If after acquiring  the property the client later contributed it to an LLC, however,  cumulative transfers of more than 50% of the LLC interests  would result in reassessment, regardless of whether there was  a change in control.) If a client wishes to use the Proposition 58  exception in the future, the LLC may convey the property back  to the client without triggering a reassessment of the house (or  any transfer tax), and, thereafter, the client may transfer the  property to the child.

Limited Liability. As a general rule, and befitting the name,  an LLC’s members (i.e., owners) do not have personal liability  for the obligations of the LLC. Thus, home ownership in an LLC  may protect an individual from certain catastrophic liabilities  that may not always be covered (or fully covered) by ordinary  homeowner’s insurance. To preserve this protection, however,  it is important to maintain and respect the separateness of  the LLC entity. Hence, the LLC should have a separate bank  account from which all property related expenses (property  taxes, mortgage, insurance, utilities, repairs, improvements,  etc.) should be paid. In addition, all utility accounts should  be opened in the LLC’s name. Finally, the LLC should be  adequately capitalized, taking into account the value and  expenses associated with the home.

Other Issues

Title Insurance. Generally, a more robust form of title insurance  is available to individuals purchasing single family homes. Most  title companies will allow a single member LLC to obtain such  coverage as well, but it is important to confirm this with the title  company when purchasing the property. In some cases, a title  endorsement (available at a nominal cost) may be required.   Furthermore, a client that acquires a house in his individual or  trust capacity and later contributes the home to a single member  LLC should check his or her title policy to make sure it remains in effect following the transfer.

Home Loans.  Some  mor tgage  lenders  may  be  leer y  of  the LLC structure, preferring to loan to an individual. In our  experience, this is becoming less of an issue, with private  banking departments becoming more and more comfortable  with this structure.

Taxes/Costs. A single member LLC is typically a pass-through  entity and is disregarded for federal income tax purposes.  Some states, however, require that LLCs pay an annual  minimum tax or fee ($800 in California; $300 in Delaware).  California also imposes a gross receipts tax on LLCs, (which  caps out at $11,790 for gross receipts in excess of $5 million)  which could come into play on the sale of the house. In addition,  a client may incur modest additional accounting fees relating  to the LLC.