In a previous post, I wrote about how to protect your investment property (and some reasons why you might want to). Let’s say that you have decided that you DO want to protect your investment or rental property by getting it out of your own name and into an LLC for liability protection. Great! Well, here are some issues that you may encounter along the way AND some ideas for how you might deal with those issues.
And if you’re not sure if this is right for you, you can always ask a trusted professional for their advice.
If you own the property outright, you could simply transfer the property into your newly minted LLC.
BUT if your property is mortgaged then by transferring the property into your business entity, you could risk triggering a “due-on-sale” clause from your lender. What that means: it’s a clause commonly found in mortgages to restrict transferring ownership of the property. If your lender finds out you have transferred ownership out of your name and into an LLC, your lender could call in payment for the entire remaining balance on the note. At this point, you could pay off your mortgage or you could refinance the mortgage (which incurs fees, hassle, and you probably won’t get the same terms as before). Many people find dealing with that to be a pain.
If you are ok with refinancing, then the prospect of triggering the due-on-sale clause might not bother you too much. On the other hand, if you have a great loan that you want to keep, or don’t want to go through the hassle of refinancing, then there is a neat way to avoid triggering the due-on-sale clause.
There are exceptions to the due-on-sale clause, including the transfer of the mortgaged property into a revocable trust, such as a land trust. This means if you transfer ownership from your name and into a revocable land trust, your lender will not be able to demand payment of the entire note.
After your property is in your land trust, you can privately assign the beneficial interest of the trust to your LLC. This protects your property from the things mentioned here with the protection available within the LLC business entity. An additional bonus of this method: it is a private transaction.
- You don’t have to register the transfer with the government or your lender, so the transfer will go unnoticed and hence, no due-on-sale payment.
- The land trust can be drafted in a way so that your name as owner is not posted onto public databases. The databases are often used by contingency lawyers and PIs to determine whether you are a good target for a frivolous lawsuit.
Have questions? Email us!
Colin Ley is a Seattle asset protection attorney. He is also the co-founder of LayRoots along with his wife, Shreya.