Here at Law 4 Small Business, we get a lot of calls from folks asking us about “loopholes” or ways to get around having to pay legal debts — whether they be taxes, legal judgments, or otherwise. While most of these schemes are doomed to failure, one of them has gained a lot of traction over the years: the act of putting one’s home into an anonymous LLC to make it the company’s property and protect it from creditors. For more on what an anonymous LLC is, check out our other blog article: Maintaining Your Privacy with an Anonymous LLC.
The idea is that if you own your home, your creditors can go after it but if an LLC owns your home — and particularly if your creditors don’t know you own an LLC — they can’t go after the home. If you read that sentence and thought “that sounds too good to be true”, you’re absolutely right.
Don’t get me wrong, we’re happy to take your money and sell you an anonymous LLC. We form hundreds of anonymous LLC’s regularly. But, we want you to do it for the right reasons, and not inadvertently create larger problems for yourself.
Homestead Exemption
When you owe money to someone — whether it’s a debt you’ve agreed to (think credit cards, personal loans, mortgages, etc.) or it’s a monetary judgment against you issued by a court of law, whoever you owe money to (the “creditor”) is going to want to collect what’s owed to them. More often than not, this involves going before the court and asking the court to let them execute a judgment against your assets — basically letting the creditor seize your assets to pay off the debt. Courts will let creditors do this to any assets that aren’t “exempt”.
Every state has its own exemption laws that protect your property up to a certain dollar value. If your property in any category exceeds that protected dollar value, you pick which property to shield with exemptions and everything left over — that is, any property with value that exceeds the exemption amounts — can be seized and then either sold or kept by the creditor to pay down the debt. Arguably the most important of these exemptions is the Homestead Exemption — that is to say, the exemption that protects your home. Almost every state protects your home, up to some pre-determined dollar value, from being seized by creditors. This protection extends to judgment creditors and, for the most part, bankruptcy creditors, provided they don’t have a mortgage on your home. That means that, if you declare bankruptcy, you might be able to keep your home. This is a very useful protection to have.
A person who owns their home is generally entitled to the Homestead Exemption. A Limited Liability Company or other corporate entity, on the hand, is generally not entitled to a Homestead Exemption. Any home owned by an LLC can be seized by creditors without having to first apply the homestead exemption.
But it’s owned by an LLC
At this stage of the conversation, folks usually point out that they don’t own the home — their LLC does. So why should the LLC’s house be used to satisfy their personal debts? To understand that, it’s important to understand what an ownership interest in an LLC (usually called a “Membership Interest”) really is. Per the laws of most states, an LLC ownership interest is considered property of the owner. Like most other property of its owner, it can be seized to pay off creditors. Unlike most other property of its owner, an LLC Membership Interest usually isn’t subject to any exemptions except, in some circumstances, a wildcard exemption (typically a low-dollar-amount exemption that applies equally to all property). While the wildcard exemption might protect a few thousand dollars of your LLC interest, it probably wouldn’t be enough to protect an LLC that owns your home. So, in short, if you own your LLC and your LLC owns your home, your creditor might simply take your LLC to get at your home.
In some cases, you might co-own your LLC with someone else. In those circumstances, a creditor might get a “charging order” against your LLC interest. This gives them the power to administer your LLC on your behalf and, if you own the majority of that LLC, it often gives them the power to dissolve it and take your respective share of its property — including your home.
But it’s an anonymous LLC
The next question we invariably get is “but wait a minute — isn’t the whole point of an anonymous LLC that nobody knows I own it?” To answer this, one needs to understand what the “anonymous” truly means in an anonymous LLC. Some states (e.g., New Mexico, Wyoming, Delaware, and a few others) do not publish who owns LLCs formed in those states. A search of their Secretary of State databases will show an LLC exists, but it will not reveal who owns it. That is the limit of the LLC’s anonymity. When a court allows for a creditor to execute a judgment against a debtor, it may require that debtor to disclose to the court and to that creditor what assets it owns that can satisfy the judgment. A person’s ownership interest in an LLC is considered property and generally must be disclosed to the court. Failure to do so could open the debtor up to civil and criminal penalties, including, for example, perjury and willful failure to disclose.
What does this all mean?
Basically, this all means that putting your home into an LLC usually weakens your legal protections against your personal creditors. The anonymity an LLC can provide won’t protect your home from court-ordered disclosures, so, in the vast majority of cases, you’re better off keeping your home in your own name and making use of the homestead exemption.
That said, everyone’s situation is different. The legal calculus changes a great deal if you’re dealing with a second home, a rental property, or commercial property, as these usually aren’t protected by a homestead exemption to begin with. If you think you might want to put your property into an LLC, feel free to give us a call. We at Law 4 Small Business are happy to walk through your legal situation and figure out the best approach for you. Whether that’s moving your property into a corporate entity, keeping it in your own name, or something in the middle, checking with a lawyer could save you a great deal of time and expense down the road.
Law 4 Small Business, P.C. (L4SB). A little law now can save a lot later. A Slingshot company.
10 Comments
since home exemptions have all been basically taken away, it might be a good idea to now consider LLC for other protections, tho, right?
Depends on the state, but they can be helpful.
The big problem with LLC with home ownership, is that it can breach your mortgage. So, you really need to make sure you’re not going to have a problem there. Also, homes as personal residences generally have better rates and terms, over a commercial mortgage.
Larry.
My elderly parents live in Florida, their small apartment is own by LLC, they are both the owners of LLC and there’s is no mortgage at all for this property.
it’s still better for them to have this property in their name and not in LLC name ?
Thank you
Hi, Mary.
Hard to say whether it’s better or not, as there are some tradeoffs. However, by doing it the way they are doing it, they lose the Homestead Exemption.
Larry.
Hi Larry,
I am considering buying multifamily home (in Texas) with a LLC (just me in the LLC) and in future changing it to be owned by me personally. But this brings up a question…
Today it is a 6 unit multifamily home property with 4 units rented. My commercial lender says I can buy it as LLC or personally. My intention is to rehab back to a single family residence over next couple years. I will live in it as my primary home from day 1.
For me the big plus for the LLC is the liability protection against issues with renters. I don’t want our retirement savings (not in the LLC) at risk if a renter had an accident, fire, sued us, etc.
But, but here is the rub….
I am 100% certain that the value of the property will go up significantly once I start remodeling and convert this back to single family. Won’t my LLC be subject to a big capital gains tax once I try to change from LLC to personally owned by me?
Thanks
Bob
Hi Bob —
This is an interesting question. A lot of my answers for you hinge on how you intend to have your LLC taxed. Many limited liability companies with only one owner are taxed as “disregarded entities” — meaning they’re a nullity for tax purposes. If you personally own a “disregarded entity” LLC and it owns property, you personally report the income from that LLC on your Form 1040, typically Schedules C and E every year and are subject to personal taxation on the income. That also holds true if you sell the property held by the LLC — the capital gains would pass through to you personally and be taxable to you.
In the event you decide to close such an LLC and transfer the property up to you through liquidation, there may be no immediate tax consequences since you’re not actually transferring property from one taxpayer to another. Since the “disregarded entity” LLC is considered indistinguishable from you for tax purposes, there may be no tax recognition event.
As you may have noticed, I use the word “may” a lot. I’d recommend having a quick chat with me or some other tax attorney, tax accountant/CPA, or other qualified professional who can go through the facts in more detail and counsel you on exactly how you should best proceed here from a “tax optimization” standpoint — but I hope this at least helps give you some context for how these deals normally unfold. If you’d like to chat, you can quickly and easily book a consult here: Tax Attorney Consultation
Thank you for reaching out!
All the best,
Ian M. Alden
Question about taking proceeds from a sale of a house if owned personally.
House is solely owned by me. I am a day trader with an LLC account through TD Ameritrade.
Will I complicate taxes by having the net proceeds wired to my LLC trading account and using those proceeds as part of my day trading funds?
Reason for doing this is that i trade through my LLC and hold Long investments in my individual account with TDA. So I keep the 2 seperate for TTS reasons and ease of accounting when i do my taxes so if there ever was an issue I can easily prove that my LLC assets are seperated from my personal assets.
If i wire funds to my individual account and transfer those funds to my llc account through an internal asset transfer within my tda accounts that will take about 6-8 business days which is very impactful for me as a trader to have large amounts of money tied up like that for no good reason. Wire directly to my LLC account will be same or next day.
TLDR: I want to have access to my funds asap to use for trading purposes. Will it make any difference if i just wire the net proceeds from the house sale to my LLC account even though the LLC is a disregarded entity?
Thank you very much in advance!
Hi, Colin —
Thank you for your question. There’s a lot of moving parts to what you’re describing here. If you sell your personally-owned home and have the funds wired to your wholly-owned LLC, it’s essentially as though you personally received the funds and then made a capital contribution into your LLC. The tax effects of this are particularly moot if that LLC is treated as a disregarded entity.
That said, the risk you run by going that way (as opposed to actually receiving the funds in your personal account and then contributing them afterwards) is that this could be seen as improper commingling of funds. In the event the LLC were to be sued for any particular reason, and a judgment successfully obtained against that LLC, the argument could be made that your commingling of funds in such a manner negates the liability shield (the “corporate veil”) and that any judgment should be executable against you personally.
So, in short, I would not recommend the approach you’re considering. Please let us know if you have any other questions! We do offer a Tax Attorney Consultation if you’d like to go over scenarios or ideas like this in more detail.
All the best,
Ian M. Alden
Hi,
I bought my first house personally but sell it to my LLC a year later so that my LLC has rental property and it frees up my personal liabilities, as I recreate my house-flipping business (another city, 10 years later), and to show assets for the LLC.
Do you recommend against this?
Hi, James.
It really depends on the issues we raised in the blog article. How much equity do you have? Is the homestead exemption worth saving? Also, do you have a mortgage and are you making sure you’re not violating the mortgage by placing your home in a LLC?
You should consult with a business attorney licensed in your home state.
Larry.