A brief outline
If you’re looking for a way to buy a home, other than in your personal capacity, you can consider the option of buying a home as a business. You may be wondering; how can a business buy a house? We’ll take you through this and explain the benefits and risks of buying a house through your business, so that you can decide if this is the best choice for you.
If you own your own business or you’re wondering how to start a house flipping business, you may want to purchase a property under your business entity. There are many reasons why this could work out better than buying a property in your personal capacity. According to some brokers, up to 80% of new mortgage applications are for limited companies, and investors are snapping up 3 out of 4 vacant homes. Let’s take a look at the ins and outs of a business buying a house, and whether it’s the right move for you.
Can a business buy a house?
The short answer is… yes! Real estate itself is a business, so it stands to reason that businesses can engage in real estate transactions too. There are various ways this can work, and if you’re looking at the best business entities for real estate investment, you’ll see that one of the most common is an LLC (Limited Liability Corporation). Now let’s take a brief look at how to buy a house through your business.
The process works very similarly to an individual buying a property. It starts with locating a property and making an offer as if you were buying the property for yourself. Once the offer to purchase is accepted, the transaction will be geared towards your specific business.
Next, you’ll apply for a mortgage or loan the same way you would as an individual, however, you’ll likely need extra information relating to the business, such as bank statements and income verification to prove that you can pay back the loan.
Once you’ve secured a loan, the transaction can be finalized by a representative of your company, and your tax number will need to be provided, to close the sale.
The tax benefits of buying a house through a business
Buying a house as a business can give you a few great advantages over buying a house in your personal capacity, which is why this has become such a popular method. Let’s take a look at a few of these benefits.
Buying a property under a business entity allows you to retain your privacy because the business or LLC name appears on all public documents, instead of yours. You can therefore keep your identity out of the transaction and your information can remain private.
Buying a home using an LLC can give you tax benefits because you won’t be taxed twice. There’s a pass-through tax structure which means that the LLC itself will have to pay tax, but the owner won’t. Which makes purchasing a property through the LLC a tax advantage.
The Ability to Invest with others
Using a business to purchase a property means that you can invest with others (friends or business partners) easier than if you were buying in a personal capacity. In a business context, an LLC makes this easily possible even for people who don’t know the LLC owner. Bear in mind though, there needs to be a business case for this.
Personal Asset Protection
Buying a home through a business affords investors more protection, as they will not personally be liable for anything that happens on the property, such as an injury, that could lead to a lawsuit. The only assets that can be used for the lawsuit are the the ones belonging to the business.
The risks of buying a house through a business
Setting up a business, in this case an LLC, can be costly as a result of all the legal fees, business licensing and permit fees. You can save on taxes and other areas, however the initial business setup is going to cost you, so remember this before you consider this route.
Mortgage and loan issues
Getting a mortgage as a business entity like an LLC can be more difficult as lenders don’t always like to lend to a business with limited liability. The reason is that members of the business cannot be held personally liable for anything, so the debt is only backed by the business, in which case banks may only provide a small amount of funds.
As for alternative loans, a business entity does not qualify for other loans such as FHA loans and Fannie Mae. For first-time real estate investors who are looking to tap into the FHA’s low down payment options, going through a business entity might not be the best route.
Capital gains tax exemptions
Purchasing a house as a business means that you’ll miss out on the capital gains tax exemptions that those who own a home as an individual are afforded. Individuals don’t need to pay tax on the first $250,000 on a house that they’re buying as a primary residence, but because businesses are not usually using this as a primary residence, they will not get the same allowance.
Higher interest rates
Interest on investment loans is generally higher than that of mortgages used for a primary residence. An investment property usually isn’t priority when someone is in financial difficulty, so the interest rates are higher to mitigate the risk for lenders.
Final thoughts: Should you use a business to buy a house?
The decision on whether to buy a house via your business or in your personal capacity rests on your personal circumstances. People generally buy a house in their personal capacity if they’re planning on using it as their primary residence, or if they are new to real estate investing and buying a second property to flip or rent out and don’t yet have a business. First time investors can avoid the extra costs and capital gains exemption loss by buying a property in their own name to start with.
Buying a house through a business can be a good idea for seasoned real estate investors because they have an established real estate business and they can do the deals through this business, and have their personal assets protected by going through an LLC. Purchasing an investment property through a business also ensures that you have limited liability, tax benefits and partnership opportunities.
Can my LLC buy my house?
Once you own your home and your mortgage is paid off entirely, you can transfer it to your LLC easily. However, if you haven’t fully paid off your mortgage yet and you want to transfer the property to your LLC, the due-on-sale clause and mortgage acceleration clause would come into effect.
The due-on-sale clause requires you to repay the mortgage in its entirety if you sell or transfer the property. Which means that you’ll need to pay the balance before ownership can transfer to your LLC. With a mortgage acceleration clause, you’re required to pay back the entire loan immediately, including interest, before you can transfer the property.
Technically you can do this, however there are a few things to consider first. You can only rent an LLC to an entity that files its own tax returns, in other words you can’t rent it out to a disregarded entity. Next, you’ll need to make sure that you collect rent every month and declare it, all in the usual legal manner. However, this means that you’re now receiving an income from your LLC and you’ll therefore be taxed on this.
If your home is a rental falling under your LLC then another consideration is the depreciation deduction that will be made on your home, which will offset the income. In the future, if you want to sell your home, you’ll need to pay tax with ordinary income tax rates on the sale or depreciation taken before.
Yes, you can use business credit to purchase a property. It’s particularly useful for investors who are looking for commercial loans and it offers less personal risk. Instead of checking your personal credit history, lenders will check your business credit history and the value of the property.