How to Transfer Your Minnesota Rental Property Into an LLC

Why do people transfer properties into an LLC anyway? The main reason is liability protection. The next question is, well, what are the steps? What do I have to do to do this? Today we're going to look at what those actual steps are, so you can know what the next things you need to be thinking of are, and what you're going to do.

Number one, you're going to form your LLC properly.

First of all, choose your state. You can form an LLC in any state. Many people suggest that you do LLCs in different states for your protection or anonymity, going to Delaware, Wyoming, Nevada, New Mexico. People create all kinds of reasons to go to different states.

But remember, if you file in a state where you don't live, and then the LLC is doing business in the state where you do live, you may actually create a second level of filing, where you then have to file as a foreign company doing business in your local state. So I'm a big fan of actually looking at your local state and at the goals of your LLC, and seeing: do you really need to file that Wyoming LLC, or will your local state's LLC laws protect you in the way you're looking to be protected?

Once you've chosen a state, you need to file what we call the articles of organization. They have different names in different states, but it's a filing with the state to let it know you formed the company. Here's the name of the company and some basic information, often the address, the registered agent, the basics on the company. Now, one of the nice things about LLCs is we often do not have to disclose who the owners of the LLC actually are, which is why it's one of the favored types of companies people like to file.

The most important step in my mind, after we have filed that LLC, is to make sure we do an operating agreement. Even for single-member LLCs, an operating agreement is extremely important. It's a foundational document that shows the world that this LLC is legitimate, especially if you have any problems down the road.

One common misconception I run into is that we have to file our LLC operating agreement. The reality is, in most states, you do not file an operating agreement. It stays internal to your LLC. It's a private document. We want to keep that information about the business private. It doesn't need to be filed with the state.

Once we've taken care of those initial filings, we go over to the IRS. We reach out to the government and we get an EIN for your LLC. An EIN is similar to a tax ID or Social Security number for your LLC, and it allows you to pay taxes, because the government, of course, wants their taxes.

Step two: we're going to review our mortgage and our insurance on the property.

Your mortgage may contain what's called a due-on-sale clause, and that means that if the property is transferred out of your name and into somebody else's name, but the mortgage was in your name, it may trigger the rest of the mortgage. So if you have $250,000 in payments left, technically that due-on-sale clause would say, when you've moved the property into the LLC, you owe the $250,000.

How do we avoid that? We get lender approval.

I've worked with different mortgage professionals over the years, and they usually will tell me that nobody ever calls on the due-on-sale clause. They will allow you to make this LLC transfer. But I'm an attorney, and I have to worry about your protection, so I'm going to tell you to reach out to your lender anyway to make sure they will approve it. I have had clients who were intending to move the property into the LLC, only to find out their lender would not allow transfers to an LLC, and that created a real monkey wrench in the real estate investing business. So while they will likely allow it, you want to make sure your lender will approve it.

And once we're approved by the lender, we also need to speak to our insurance company. We want to work with our insurance professional to make sure that your insurance policies are all properly updated to reflect that the LLC now owns the property.

Step three: once you've got the approvals, moving the property over is what we call a deed transfer. This is usually done through either a quit claim or a warranty deed, and what this does is officially move the ownership of the property from your name, or whoever's name it was in, into the name of the LLC. This is a very important step. And while, if we look at the prior steps in the process, things like filing with your state, creating an operating agreement, getting an EIN from the government, that's stuff that you probably can do yourself. I don't always recommend it. A lot of people will reach out to either AI these days, or go to a website and get some of the standard forms. I don't recommend you try to do it all yourself, but when we get to this step in the process, the deed transfer process, we want to make sure we're working with a professional. This is not where you want to mess something up. This can really create problems. This is how we're officially moving the property into the LLC.

So step four: with the deed prepared, we now have to file it with your county, and this is why we want to work with a professional. We want to make sure that it's properly recorded with the property registrar, your county clerk, whatever they're called in your county. You need to make sure you're paying any required fees and any transfer taxes for the transaction, and sometimes it may trigger a tax filing, depending upon the state you're in. But that's where we're going to want to loop in our accountants and make sure that they've spoken with us about what the tax implications are of moving that property into the LLC.

Those are the four main steps, and they're pretty common across the board for LLCs. But we may run into a few other things that you want to consider or pay attention to.

Once you have that EIN number, go to your bank and get a bank account. Now remember, some banks are going to want to see either a corporate resolution or your operating agreement to allow you to open a bank account, which is why it's important, back in step one, to get that operating agreement put together.

The second thing we'll look at is lease agreements. So if we have a rental property with a tenant already, the lease agreement may need to be updated. If we're going to have tenants in the future and we don't have them yet, we want to make sure we're creating a proper lease agreement between the LLC and the upcoming tenants.

Again, go back and check your insurance to make sure all the insurance policies have been updated as necessary.

Now that you have an LLC, you also need to make sure you're keeping your accounting records, and you probably want to work with an accountant, or at least have one that you can speak to, to make sure you're getting the tax filings correct.

And if you're managing a variety of real estate rentals, you may consider working with a property management company. It can take a lot of the burdens off your plate. They manage properties for a fee, and they can take a lot of the day-to-day work off your plate when it comes to the rental properties. You're not the one finding the plumber, finding the handyman. Again, it's going to cost you some money, so you'll have to weigh that against what you're going to get from the property. But if you're not someone who wants to be a very hands-on rental landlord, then a property management company could be a real asset for you.

I've got a couple of common mistakes I want to make sure you avoid. The biggest one is forgetting to transfer the deed. So a lot of people will create the LLC, and they may even set up a lease, and they think everything's fine. It's very common in the Airbnb world. But they don't actually transfer the property using the deed. So we want to make sure that's one big mistake that we don't make.

The next one is, we don't want to mix our personal finances and the LLC finances. The whole point of that liability protection of using the LLC is to keep these things separate. So make sure we're keeping them separate. And finally, don't just assume that that LLC is going to protect you. There can be a lot of little things that come up, and we want to make sure we're following the right procedures, with the operating agreement in place, keeping separate finances, so we can actually keep that liability protection in place.

If you have further questions, you can head over to my website, AndrewMAyers.com. There's a red Legal Strategy Session button on the front page. Click it and you'll be taken to my scheduling page. We can set up a 15 or 20 minute phone call to discuss where you are in the LLC process.

If you liked this video, you can hit the like or thumbs-up button below. You can head over to YouTube or AyersLawTV.com to subscribe for future episodes. And remember that transferring property into an LLC is not just paperwork. Done right, it can protect your assets, but done wrong, it can create really expensive problems.