Authored By: Ryan Featherstone, Esq. rfeatherstone@dunlapmoran.com
“You own a residential property? You should put it in an LLC in case of a ‘slip and fall’”. Does this sound familiar? It is a very common conversation amongst investors. And it is often the advice of attorneys.
There is nothing wrong with this advice, but the issue is more complicated than just a limitation of liability. While that is of course a benefit of LLC ownership, among others, there are other considerations that should be factored into the decision of whether to title a property in an LLC.
Loss of Homestead: properties owned in LLCs (or other business entities) cannot be the homestead of the individual owners of the LLC, therefore a transfer of a property into an LLC would result in the loss of a previously obtained homestead tax exemption, or the prevention of the obtaining of a homestead tax exemption, and would also result in the loss of the homestead status of the property for protection from creditors’ claims provided by the Florida constitution.
Reassessment: the change in ownership to an LLC will trigger reassessment of the property for property tax purposes at the fair market value as of January 1 of the year following the transfer of ownership to the LLC. This means that any “caps” on annual assessed value increases (i.e. 3% for homestead property, 10% on non-homestead property) shall be removed, which could result in a significant increase in property taxes for the year after the transfer occurs.
Due on Sale Clauses: every mortgage contains a “due on sale clause,” which of course provides that the mortgage is required to be paid off in the event of a sale of the property, but these clauses also typically include a prohibition on any type of conveyance or transfer, even without a sale, occurring without the lender’s consent. Therefore, a conveyance of a property to an LLC without lender consent could result in a default and the lender calling the note due.
Transfer Taxes: Florida law requires the payment of transfer taxes (i.e. documentary stamp taxes) of $0.70 per $100 of consideration upon a conveyance by deed. This tax is imposed by the Florida Department of Revenue. Under Florida law, even when no money is changing hands, like when moving a property from an individual to an LLC owned by that individual, the law still requires the payment of transfer taxes based on any outstanding mortgage balances applicable to the property. Therefore, for example, if there is a $100,000 mortgage on the property for which a deed is recorded to move the property to an LLC, the transfer taxes owed would be $700. Not a cheap endeavor.
Other Considerations: typically, financing options when residential properties are titled in LLCs tend to be less advantageous (e.g. higher interest rates) than when properties are owned individually, and homeowners’ insurance rates tend to be more favorable for properties owned individually than owned by LLCs. Additionally, annual maintenance is required for LLCs inasmuch as needing to file an annual report every year with the state, paying a filing fee to keep the LLC active, and documenting the LLCs meetings and other events, and to ensure separation of assets of the LLC from individually owned assets to avoid commingling that could result in a potential litigant being able to circumvent the LLC ownership in a lawsuit to get to the individuals.
Keep in mind, there are several potential benefits to owning properties in LLCs which are not covered here. Those would need to be discussed in a separate article. In deciding whether to title a Florida property in an LLC or other business entity, it is always best to consult with a licensed Florida real estate attorney.
This blog is intended for informational purposes only and it is not intended to be, nor should it be construed as, legal advice or legal opinion. The reader should not consider this information to be an invitation to an attorney/client relationship, should not rely on information presented here for any purpose, and should always seek the legal advice of counsel in the appropriate jurisdiction.
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