What does an LLC do for a rental property?
An LLC puts a legal wall between the building and the rest of what you own. If a tenant wins a judgment over a fall on the stairs, the claim is generally against the LLC and what it owns, not your house or your brokerage account. That’s why investors with several properties often give each building, or a small group of them, its own LLC, so one lawsuit can’t easily reach the equity in the others.
Insurance is the first line of defense, and the LLC is the second. Most claims against rental owners are paid by the policy; the LLC matters when a claim is bigger than the coverage or falls outside it. Our apartment building insurance guide covers that first line.
Where LLC liability protection stops
An LLC protects you from the building’s debts and the acts of others, not from your own conduct or promises. Courts and lenders can reach past the LLC in a few common ways:
- Veil piercing: a court can ignore the LLC and hold the owner personally liable if the LLC is treated as an alter ego, for example rents deposited into a personal account, no separate books or an LLC with no capital to pay its own bills.
- Personal guarantees: many lenders want a personal guarantee from the owner, and even non-recourse multifamily loans usually come with a carve-out guaranty for things like fraud or unauthorized transfers. A guarantee is a direct promise the LLC can’t shield.
- Your own negligence: if you do the wiring yourself and someone gets hurt, you can be sued personally, LLC or not. The same goes for leases or contracts you sign in your own name instead of the LLC’s.
How is an LLC for rental property taxed?
A single-member LLC is a disregarded entity by default, so the IRS treats the rental as if you owned it directly. The income and expenses still go on Schedule E of your Form 1040, and there is no separate federal return.
A multi-member LLC is taxed as a partnership by default. It files Form 1065 and gives each member a Schedule K-1 showing their share of income, losses and depreciation, which each member reports on their own return. Either type can elect to be taxed as a corporation on Form 8832, though that rarely suits rental real estate.
Moving a building into your own single-member LLC doesn’t reset your tax basis or restart depreciation, because for income tax purposes nothing changed. Contributing a building to a multi-member LLC is generally tax-free under Section 721, but shifting a mortgage among partners can create gain, so have your CPA check the debt first.
How to transfer property to an LLC
To transfer property to an LLC, you form the LLC, get the lender’s and title company’s sign-off, then record a deed to the LLC.
- Form the LLC and sign an operating agreement that matches who owns what. An LLC formed in another state usually has to register where the building sits.
- Read the loan documents and ask the lender for written consent before you record anything.
- Ask the title company whether your owner’s policy will cover the LLC or whether you need an endorsement or a new policy.
- Record the deed. Many owners use a quitclaim deed; our quitclaim deed guide compares it with grant and warranty deeds.
- File any transfer tax return or change-in-ownership statement your state or county requires, even when the transfer is exempt.
- Put leases, deposits, insurance and bank accounts in the LLC’s name, and never mix its money with yours.
Will deeding a building into an LLC trigger the due-on-sale clause?
It can. A deed to your LLC is a transfer, and most mortgages let the lender call the loan after a transfer without consent. The Garn-St Germain Act blocks that only for residential property with fewer than five dwelling units, and its trust exception covers a living trust where the borrower is and remains a beneficiary. It doesn’t list transfers to an LLC at all.
For a 5+ unit building on a commercial or agency loan, it’s safe to assume you need consent. The loan documents usually spell out which transfers are allowed, what the lender wants to see and what it charges. Get consent in writing, along with confirmation that the loan stays in place with the LLC as borrower or approved owner.
Transfer tax and property tax reassessment when you deed into an LLC
Deeding a building into an LLC you own in the same proportions is often exempt from transfer tax and reassessment, but the exemption usually depends on ownership not changing. If ownership shifts later, all at once or a little at a time, the tax can come back.
California shows how this works. Revenue and Taxation Code section 62(a)(2) excludes a transfer to an entity from reassessment when each owner’s proportional interest stays the same, and section 11925(d) exempts that kind of transfer from the documentary transfer tax. New York exempts conveyances that only change the form of ownership when beneficial ownership stays the same.
The catch is California’s section 64(d): once the members, now “original co-owners,” transfer interests adding up to more than 50%, the excluded property is reassessed, even if no buyer ever gets control. Our real estate transfer tax guide and state transfer tax pages cover other states.
Worked example: a California 16-unit building in an LLC
Two partners own a 16-unit California building as tenants in common, 60% and 40%, and deed it to an LLC they own 60/40. Because proportional interests don’t change, the transfer is excluded from reassessment and exempt from the documentary transfer tax.
Three years later the 40% partner sells his whole membership interest to an outside investor. That’s 40% transferred, under the 50% line, so nothing is reassessed. Two years after that, the 60% partner sells a 15% interest to a second investor. No one has more than 50%, but the original co-owners have now transferred 55% in total, so section 64(d) reassesses the whole building.
Say the assessed value had reached $2,250,000 and the building is now worth $5,600,000. At the 1% Prop 13 general levy, base property tax goes from $22,500 to $56,000, an increase of $33,500 a year before local voter-approved rates. To a buyer using a 6% cap rate, $33,500 less NOI is worth about $558,333 less in value.
The LLC also has yearly California costs. Every LLC doing business there owes the $800 annual tax, and an LLC with total California income of $500,000 to $999,999 owes an LLC fee of $2,500. With gross rents of $640,000, that’s $3,300 a year. The fee is based on total income, so it’s gross rents that count, not profit.
| Step | Interests transferred by original co-owners | Result |
|---|---|---|
| Deed from 60/40 owners to 60/40 LLC | None (proportions unchanged) | Excluded under 62(a)(2); DTT exempt under 11925(d) |
| 40% partner sells to investor | 40% cumulative | No reassessment |
| 60% partner sells 15% to second investor | 55% cumulative | Whole building reassessed under 64(d) |
| Base tax at 1% levy | $22,500 before, $56,000 after | +$33,500 a year |
| Annual CA LLC tax and fee | $800 + $2,500 | $3,300 a year |
LLC vs living trust vs both
An LLC is for liability, and a revocable living trust is for passing property at death without probate. Because they do different jobs, many owners use both: the trust owns the LLC membership interests, and the LLC owns the building. To put property in a trust, you sign the trust and then record a deed from yourself to yourself as trustee.
A revocable trust doesn’t protect against lawsuits, because you can take the assets back at any time. It doesn’t change income taxes either, since the IRS ignores a grantor trust. What it does is keep the building out of probate and let a successor trustee take over right away. Property held until death can also get a stepped-up basis, as with a transfer on death deed.
| Question | LLC | Revocable living trust | Trust owns the LLC |
|---|---|---|---|
| Protects personal assets from building claims | Yes, within limits | No | Yes, within limits |
| Avoids probate | Not by itself | Yes | Yes |
| Federal income tax change | None for single-member | None | None for single-member |
| Garn-St Germain protection (under 5 units) | No | Yes, if borrower stays a beneficiary | No |
What is a series LLC in real estate?
A series LLC is one LLC divided into separate series, each of which can hold its own building, with each series’ debts generally enforceable only against that series’ assets. In theory, one filing does the work of several LLCs.
The shield only works if you follow the statute. Delaware’s 6 Del. C. section 18-215 requires separate records for each series, an LLC agreement providing for the limit and notice in the certificate of formation. Texas Business Organizations Code section 101.602 has similar conditions, and Illinois, under 805 ILCS 180/37-40, also requires a certificate of designation for each series.
The practical problem is outside those states. California’s Franchise Tax Board says a series LLC can’t be formed in California, and an out-of-state one must register before doing business there. Lenders and title companies can also be reluctant to lend to or insure a single series. For a large apartment building, separate standard LLCs are still the usual choice.
Selling a building owned by an LLC: deed or membership interest?
You can sell a building held in an LLC two ways: the LLC deeds the building to the buyer, or the members sell their membership interests and the LLC keeps the building. Most apartment sales close by deed, because buyers don’t want to take on the LLC’s past liabilities.
Selling membership interests rarely avoids transfer tax. New York, Washington and other states tax a transfer of a controlling interest in an entity that owns real estate, and California’s section 64(c) reassesses when someone gains more than 50% control. Income tax differs too. Selling all of a disregarded single-member LLC is treated as selling the building and can work in a 1031 exchange. Section 1031 covers only real property, and a partnership interest isn’t real property, so selling your share of a multi-member LLC can’t be exchanged.
| LLC sells by deed | Members sell membership interests | |
|---|---|---|
| What the buyer gets | The building, new title policy | The LLC, its history and liabilities |
| Transfer tax | Usually due on the price | Often due under controlling-interest rules |
| Existing loan | Paid off or assumed with approval | Change of ownership usually needs consent |
| 1031 exchange | Yes, by the LLC | Only if single-member (disregarded) |
How this works for a 5+ unit apartment building
With a 5+ unit building, an LLC is close to standard, and lenders generally expect an entity borrower anyway. The real question is whether the structure is clean enough to sell or refinance without surprises.
Before a sale, gather the operating agreement, the deed into the LLC, the lender’s consent and the title policy, and confirm who can sign. Gaps there slow closings more than taxes do.
Selling your LLC-owned building to Skyline
Skyline Capital Investments buys apartment buildings with five or more units nationwide, including buildings held in single-member LLCs, multi-member LLCs and trusts. We work with your title company on signing authority, member consents and payoffs, and we can offer seller-carry terms or fit a 1031 exchange timeline.
Send the address and unit count through the form on this page or call (469) 660-2977. We typically respond within 48 hours.
