Transferring Property to an LLC in Florida

Transferring your real estate to an LLC provides asset protection, business planning flexibility, and privacy. An LLC separates business operations from your personal assets. If you own real property in your own name, a tenant or other third–party may sue you personally if they have a legal complaint.

For real property titled in the name of an LLC, your adversary’s remedy is to file the claim against your LLC instead of yourself personally.

For multi-member LLCs, your LLC membership interest is protected against lawsuits unrelated to the LLC’s real estate assets. A judgment creditor’s sole collection remedy is a charging lien against LLC cash distributions, if any. A creditor may not levy on your LLC interest nor attack the assets held inside your real estate LLC.

The LLC provides business and tax planning flexibility. Individuals who manage multiple real estate properties can consolidate ownership, control, and tax reporting through an LLC holding company.

How to Transfer Real Estate to an LLC

You can transfer real estate to an LLC by quitclaim deed or warranty deed. Warranty deeds are used when real estate is sold because the warranty deed guarantees clean title to the new buyer. Quitclaim deeds are typically used to convey one’s real property to an LLC when there is no significant change in the beneficial owners.

The deed must be recorded in the public record to be legally effective.

Mortgage real estate is usually subject to “due-on-sale” clauses in the mortgage documents. The due-on-sale clause gives the lender the right to accelerate the full mortgage balance if the underlying property is sold.

In our experience, mortgage lenders have not exercised due-on-sale provisions when our clients have changed the legal title of their real property to their own LLC.

Costs of Conveying Real Estate to an LLC

Transferring real estate to your own LLC may incur transaction fees such as documentary stamp taxes. If you do not receive payment for the transfer, most Florida counties still impose transfer fees if the property is mortgaged.

These fees are based on the outstanding mortgage balance at a rate of 0.007 per dollar. There are no significant documentary stamp taxes for transferring unencumbered property to an LLC.

Loss of Homestead Protection

Florida’s unlimited homestead exemption from civil judgment collection only applies to “natural persons.” You will lose homestead protection if you transfer your primary residence to an LLC—even if you are the sole owner—because an LLC is not a natural person.

In addition to losing asset protection, you will also forfeit the homestead tax exemption applied to your property tax bill.

Increased Property Tax Assessment

The Florida Constitution limits the annual increase in assessed value for homestead property to the lesser of 3% or the Consumer Price Index. For non-homestead real estate, the cap is 10%.

Any change in ownership, including by sale, gift, or contribution to an LLC, triggers a reassessment based on current fair market value. Your property will be reassessed again if your LLC later transfers the property back to your individual name.

Federal Income Tax Risk

Transferring real property to an LLC may trigger income tax consequences if there’s a change in beneficial ownership. For example, transferring property to an LLC owned by you and family members or a trust may be considered a gift, requiring a gift tax return.

If the LLC is taxed as a corporation, distributing real property to members may be treated as a sale, possibly triggering income recognition and depreciation recapture. However, no tax is due when a disregarded entity or partnership distributes property to its members.

Property and Liability Insurance

Transferring real estate to an LLC may affect your insurance coverage. Your personal homeowner’s policy likely won’t cover property once it’s owned by an LLC. If there’s a claim, you may find that no coverage applies.

In addition, premiums may be higher when the property is titled in an LLC. You should ensure that the LLC is listed as an insured party on all relevant insurance policies.

Summary

Conveying your real estate to an LLC can provide asset protection benefits, but you should be aware of potential legal and tax pitfalls such as loss of homestead status, property tax increases, insurance issues, and federal tax issues.