OOPS: I Bought My Rental Property in an LLC…

If you own title to a residential rental property via an LLC (“limited liability company”), then you better have owned this asset for at least 24for rent months and reported it on Schedule E of your 1040 tax return – otherwise you will have a tough time utilizing the income from this property to qualify for a loan.  Without the 24-month seasoning period, there is a good chance the net rental income cannot be used in calculating your Debt-to-Income ratio (DTI) unless you elect to transfer title from the LLC to your individual name.

Now don’t rush out and transfer the ownership from the LLC to yourself personally without first consulting with your accountant and lawyer – especially because of the potential tax ramifications and liability risks.  But you won’t get conventional residential financing for your LLC rental property, because the lender will treat it as if it were a commercial property (which means lower LTV requirements and higher pricing – even if you personally guarantee the loan).

On the other hand, if title is in your name, then typically 100% of the income and expenses on Schedule E can be used to calculate your DTI – without having to comply with the 24-month rule.  In addition, if the property is so new that it has not yet been reported on your previous tax return, then some lenders will allow you to use 75% of the revenue (confirmed via the lease) less PITI, with only 75% used to account for other standard expenses you will incur.

Here’s the Point: Many of my clients can’t conventionally finance their LLC-owned residential rental properties because they haven’t owned them long enough. If you plan to finance the purchase of one or more of these assets, then in conjunction with your advisor you might consider owning them in your name as opposed to in an LLC.
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Laureen Brown - September 17, 2014 Reply

Thank-you so much! I do own my rental property in my own name! You are right again!~

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