If an individual chooses to form an LLC for property ownership purposes after the purchase of the property in their own name, it is possible for that individual to transfer ownership. A transfer deed can be executed, delivered and recorded whereby ownership is transferred from the individual to the LLC.
However, there are some key considerations at issue. One of many considerations will be discussed below.
An individual should review their loan documents to investigate how such a transfer will affect the loan terms. Many loans include what is typically described as a “due upon sale” clause. This clause is triggered when the subject property is sold, transferred, conveyed (some other triggering terms may be included, one must examine the documents closely, preferably with an attorney). In short, this clause allows the bank to “call” the loan upon the sale of the property to a person or entity other than the person or entity upon which that bank issued the loan. That is, the bank can demand the full loan amount immediately. This process makes sense generally. The bank made an informed decision to loan person/entity X a certain amount of money based on X’s credit report, income, etc. If X transfers the property to Y, the bank has reserved the right to halt the deal and demand their loaned amount–"calling” the loan.
That being said, one may consider approaching their loan representative and presenting the situation. A bank may allow such a transfer under the circumstances, in essence waiving and disregarding the “due upon sale” clause. Many times, especially on multi-family or commercial properties, banks prefer that the property be held under a business entity such as an LLC because it limits liability (as discussed in earlier posts), therefore helping ensure that the loan payments will be made to the bank, on time and in full, well into the future.
There are additional considerations related to the transfer described above. One significant consideration is tax-related (POTENTIAL CAPITAL GAINS TAX). This can be of issue if the value of the property is higher at the time of the transfer compared to the original purchase price.
To conclude, if one is considering a transfer as described above, it is advisable to consult with a real estate attorney to review the loan contract. Contact Griswold Law today for more information.