Published:
April 27, 2021

Why you should put your co-buy property in a LLC

Co-buying is all about trust, communication and transparency. We already covered resolving disputes with an operating agreement, but how do you protect yourselves and your individual finances? A LLC (Limited Liability Company) provides protection and flexibility for your group and it’s relatively straightforward to set up and manage.

Benefits of owning property as a LLC

  • Protects individual finances and risk exposure. If you rent out your property and you get sued by a tenant, they will not be able to sue individual group members… just the LLC.
  • Makes finances easier. Open up a group bank account under the LLC to manage payments, reimbursements and payments from tenants.
  • Streamline and reduce taxes. A LLC makes taxes more straightforward and reduces individual taxes. Instead of each member of your group reporting individual income from the property (typically taxed at 24%-39%), each individual reports income as capital gains (typically 20%).
  • Makes it easier to make equity changes. If someone in your group wanted to sell their stake it’s much easier and is handled through the LLC. Changes to clauses or ownersip can all be handled through an operating agreement.
  • Privacy. Tenants don’t necessarily have to know the individual names of the owners in the group. They just know the name of the LLC which can increase privacy.

Assigning ownership of the LLC

Assigning ownership of the LLC to each group member is simple. You will list each person as an owner of the LLC on your formation docs your state provides and assign % ownership or equity of the LLC in your operating agreement. If you ever want to reassign or change ownership, your group can make an amendment to the operating agreement with everyone’s permission. This can be useful if you want to add a new person to your group or a group member wants to sell their % ownership.

When you should form a LLC

Once your group is ready to purchase property, you’ll want to create a LLC to transfer the property to after you purchase it. You’ll buy the property together as individuals then transfer it to the LLC post-purchase.

Why can’t you buy the property as a LLC? Almost always, banks will not lend money to a LLC. They will lend to your group based on your collective borrowing power and credit.

You’ll start by going to your state’s secretary of state website and looking for a LLC creation form (sometimes called “Articles of Organization”). For CA residents, go here.  

How much does a LLC cost?

  • Depending on the state you form your LLC in, there is an annual fee. CA for example, is $800 per year.
  • Also, your state will most likely have a transfer fee that is a one time payment for transferring your property title to your LLC. This is typically a % of the total amount of your property. In the county of San Francisco this can be $7,500 on a property worth $1,000,000.

Resource links

California Secretary of State LLC formation site: https://www.sos.ca.gov/business-programs/business-entities/filing-tips

Step-by-step transfer process on LegalZoom: https://www.legalzoom.com/articles/how-do-i-transfer-title-of-a-property-from-a-person-to-an-llc


Nestment, Inc. does not guarantee and is in no way responsible for the accuracy of information provided in this blog post. All information is provided “AS IS” and with all faults. Data presented here may not reflect all real estate activity in the market.  While the information on this site is about legal and tax issues, it is not intended as legal or tax advice or as a substitute for the particularized advice of your own attorney and tax professional.