Buying a Property as an LLC or Trust in San Diego: Risks and Benefits
Photo Credit: Mark Moz
I get a lot of questions from clients and potential clients about setting up an LLC or a trust to purchase a home or investment property in San Diego.
While these are both good options, they do involve a little more work and a few more details than buying property under your own name, and there are some good reasons not to use them as well.
If you’re considering setting up an LLC or a trust to make a home purchase, here are a few things you should know:
BUYING A HOME AS AN LLC IN SAN DIEGO
For buying investment properties, forming an LLC has several major benefits. First, acting as an LLC helps protect you from lawsuits. If your property is managed by an LLC, you as the owner usually cannot be sued personally; rather, most lawsuits will be limited to what the LLC itself owns. This means your personal assets and home are more difficult to be touched. This limited personal liability can be especially important if you’re considering a commercial property, like a multi-family apartment building or a commercial retail space. Since these properties have a lot more people going in and out every day, they tend to be at higher risk of lawsuits than a single-family home.
Second, buying under an LLC gives you a certain level of privacy and anonymity. Although it is fairly simple to look up the owner and/or manager of a corporation in many states (including California), some people won't make the effort to track down the “face” behind an LLC. So unless you choose to advertise the fact that you own a certain property OR someone is working hard to locate you, an LLC can help protect your and your family’s privacy. If it's privacy or anonymity you seek, it's highly imperative that you consult with qualified tax and legal professionals before you begin your home search.
Third, you can do it alone. You can form an LLC with a partner or partners, but you can also own one solely. You also don’t need to hire any employees or report to a board of directors.
SO WHAT ARE THE DOWNSIDES? The biggest “con” to purchasing a property using an LLC is the ongoing cost. In addition to hiring an attorney to draft all of the necessary legal paperwork, you’ll also have to pay annual state fees to keep your LLC registered. In some states, these fees can easily reach $2,000 or more. Forming an LLC can also impact your property taxes and future capital gains taxes (especially if the home is your primary residence). Paperwork is also a little more onerous with an LLC, as you’ll need to file additional tax returns every year. And if you're looking for a level of privacy, you'll be paying someone to act as the manager for your LLC, so your name doesn't show up as much in public records.
It can also be difficult to coordinate financing when purchasing a home as an LLC. Loan guidelines stipulate that one or more individuals needs to sign as guarantor(s) of the loan. It is not possible to to get financing directly as an LLC, mainly because it would be too difficult for the bank to pursue recourse with an LLC if the loan went into default. It is possible to transfer, or “quit claim”, the title into an LLC after you close on a property; however, this means more paperwork!
Read Also: 14 Questions to Ask During the Loan Preapproval Process
Another downside of buying property as an LLC in San Diego is that California has strict rent-control laws for businesses (corporations, LLCs, etc.).
BUYING A HOME AS A TRUST IN SAN DIEGO
Let’s move on to real estate trusts. This option is used for several reasons: to protect the property owner’s anonymity, to help with estate planning, or to allow a group of people to go in on a property together without getting taxed as an LLC or other corporation. Similar to an LLC, a real estate trust can help keep the name of the property owner(s) more private. A trust can reduce your estate tax burden by decreasing the value of your personal assets and can help ensure that a property can be transferred to your heir or heirs. Finally, in the case of multiple owners, forming a trust can make it easier to document and keep track of the ownership interests of all parties.
Read Also: How Much Are Property Taxes in San Diego County?
There are two types of trusts typically used to purchase properties: irrevocable AND revocable. With an irrevocable trust, the beneficiary of the trust immediately takes control over the assets. This means that the creator of the trust cannot dissolve or change the trust in any way; only the beneficiary maintains those powers. With a revocable trust, the creator of the trust retains the ability to make changes to the agreement.
Trusts do have some downsides similar to those we encounter with LLCs. The most important of these “cons” is that, as with an LLC, it can be challenging to get financing as a trust. Banks typically can only loan to an individual or individuals. However, it might be possible to take the property’s title as a trust, as long as the trust meets the lender’s requirements. You will typically need a trust certification that contains all relevant information related to the trust’s ability to hold title to real property.
Read Also: How a Lazy Loan Officer Can Ruin Your Purchase Transaction
SO WHY NOT JUST PURCHASE THE PROPERTY under your own name? Of course, there are many reasons to buy a home in San Diego as an individual, too.
(A) You’ll save money by avoiding the cost of hiring an attorney and maintaining an LLC.
(B) Liability insurance is typically cheaper under an individual’s name.
(C) It can also be easier to obtain a mortgage under your own name because banks like the idea of having recourse to personal assets if you default on your payments.
This brings us back to the issue of liability. The main reason some people turn to LLCs and trusts when purchasing properties is to better protect themselves, their families, and their personal assets.
Whether you’re considering buying a personal residence or investment property as an individual or under an LLC or a trust, you need to have a team of professionals you can trust. It’s important to have a good plan in place to help your purchase transaction hum along without extra hassles or issues.
Also Read: What is a Buyer Strategy Session?
Also Read: 4 Reasons to Hire an Exclusive Buyer Agent
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Justin Gramm is the founder and principal broker of Globella Buyers Realty, your San Diego Exclusive Buyer Brokerage.
Exclusive Buyer Agents do not list homes for sale and never represent sellers. They have no "inventory" to try to sell you. They can represent you in purchasing any home. They are specialists at representing buyers only on the buyers' side of the transaction. Exclusive Buyer Agents work to get buyers the best price and terms when they buy a home.
If you are paying "all-cash" and plan to buy a home or condo in San Diego County within 90 days, contact Justin Gramm to hire an agent on your side of the transaction. Call Justin at 858-437-2662 or Email.
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